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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___ Commission file number 0-10068
ICO, INC.
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(Exact name of registrant as specified in its charter)
TEXAS 76-0566682
(State of other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
11490 WESTHEIMER, SUITE 1000 77077
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER (281) 721-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, NO PAR VALUE
RIGHTS TO PURCHASE JUNIOR PARTICIPATING PREFERRED STOCK
PREFERRED STOCK, NO PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by nonaffiliates
of the Registrant as of December 13, 1999 was $29,717,000.
The number of shares outstanding of the registrant's Common Stock
as of December 13, 1999: Common Stock, no par value -- 22,406,506
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the definitive proxy statement for the Registrant's 2000 Annual
Meeting of Shareholders are incorporated by reference in Part III of this Form
10-K. Such definitive proxy statement or the information to be so incorporated
will be filed with the Securities and Exchange Commission not later than 120
days subsequent to September 30, 1999.
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ICO, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business.................................................................................... 1
Item 2. Properties.................................................................................. 11
Item 3. Legal Proceedings........................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders (no response required).................. -
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters................................................................. 16
Item 6. Selected Financial Data..................................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 34
Item 8. Financial Statements and Supplementary Data................................................. 34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 34
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 35
Item 11. Executive Compensation...................................................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 35
Item 13. Certain Relationships and Related Transactions.............................................. 35
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 36
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PART I
(dollar figures in thousands)
ITEM 1. BUSINESS
GENERAL
ICO, Inc. ("the Company"), provides specialized petrochemical
processing and oilfield services. In the petrochemical processing segment, the
Company provides grinding, air milling, and ancillary services for petrochemical
resins produced in pellet form (size reduction services); formulates and
manufactures concentrated products for blending with petrochemical resins to
give finished products desired characteristics such as color or protection from
ultraviolet light; and provides related distribution services. The Company's
specialty petrochemical processing customers include major chemical companies,
petrochemical production affiliates of major oil exploration and production
companies and manufacturers of plastic products. In the oilfield services
segment, ICO is a leading provider of inspection, reconditioning and coating
services for new and used tubular goods and sucker rods used in the oil and gas
industries. The Company's oilfield services segment reduces customers' drilling
and production costs by preventing faulty tubular goods from being placed
downhole (exploration services), by reclaiming and reconditioning used tubular
goods and sucker rods (production services), and by preventing the premature
failure of tubular goods and sucker rods from occurring due to the corrosive
downhole drilling environment (corrosion control services). Although
comprehensive industry statistics are not readily available, ICO believes it is
one of the two largest providers of inspection, reconditioning and coating
services for tubular goods in the United States. The Company's customers in the
oilfield services segment include many of the leading integrated oil companies
and large independent oil and gas exploration and production companies.
The Company was incorporated in 1978 under the laws of the state of
Texas. During fiscal 1998, the Company was reorganized into a holding company
structure with new ICO, Inc., a Texas corporation, serving as the holding
company. References to the "Company" include ICO, Inc., its subsidiaries and
predecessors unless the context requires otherwise.
PETROCHEMICAL PROCESSING SERVICES
The Company's petrochemical processing business segment provides both
size reduction services (grinding and related services such as blending and
screening) and compounding services (including manufacturing concentrates for
use in petrochemical products). Several of the size reduction operations also
provide compounding, blending, and mixing services. The Company conducts its
size reduction and compounding operations in the United States, Europe and
Southeast Asia. The Company's concentrate manufacturing operations are conducted
primarily through the Company's wholly-owned subsidiaries, Bayshore Industrial,
Inc., which operates in the United States, and Rotec Chemicals, Ltd. and Soreco
S.A., both of which operate in Europe.
The Company's size reduction and related processing services and
compounding operations are an intermediate step between the production of
petrochemical resins and the manufacture of a wide variety of end products, such
as paint, garbage bags, plastic film or other objects made of plastic. Chemical
manufacturers generally produce petrochemical resins in pellet form. Various
manufacturing processes, such as rotational molding, necessary to produce
finished plastic or other petrochemical products require the pellets to be
ground into smaller sizes, or to be mixed with additives and recombined, before
end products having the desired
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characteristics are produced. The Company's size reduction services involve the
grinding or air milling of pellets into smaller sizes and, in some cases, the
blending or compounding of petrochemical pellets with other additives or
fillers, such as colored pigments. The Company's concentrates manufacturing
operations involve the production of additives which, when blended into resin,
produce materials with desired properties such as anti-blocking (to prevent
plastic film or sheets from sticking together), flame-retardancy, color,
ultraviolet stabilization, impact and tear resistance, or adhesion.
Size Reduction and Compounding Services. The Company's size reduction
services include ambient grinding, cryogenic grinding and jet milling to reduce
customer materials to a powder. Materials processed by the Company include
polyethylene, polyester, polypropylene, nylon, fluorocarbons, cellulose acetate,
vinyls, phenolics, polyurethane, acrylics, epoxies, waxes and others. The
Company is a leading provider of size reduction services in the United States,
Western Europe, New Zealand and Australia.
The majority of the Company's size reduction services involve ambient
grinding, a mechanical attrition milling process suitable for products which do
not require ultra fine particle size and are not highly heat sensitive.
Typically, using company-manufactured equipment, the Company grinds pellets of
various materials into powders used in manufacturing household and automotive
items (such as household furniture, trash receptacles and plastic automobile
parts), agricultural products (such as fertilizer and water tanks), paint, metal
and fabric coatings. The powders are also used as raw material for additional
processing in which they are combined with additives or colors. Many of the
resulting final products are produced by rotational molding, and the Company
provides a substantial portion of its size reduction services to customers that
are either rotational molders or that supply the rotational molding industry.
Rotational molding produces plastic products by melting pre-measured
plastic powder in molds which are heated in an oven while being rotated. The
melting resin sticks to the hot mold and evenly coats the mold's surface. This
process offers design advantages over other molding processes, such as injection
molding, because assembly of multiple parts is unnecessary, consistent thickness
can be maintained, tooling is less expensive, and molds do not need to be
designed to withstand the high pressures inherent in injection molding. Examples
of end products which are rotationally molded include: agricultural tanks, toys
and small recreational watercraft.
The Company provides jet milling for brittle products requiring very
fine particle size, such as additives for printing ink, adhesives, waxes and
cosmetics. Jet milling uses high velocity compressed air to reduce materials to
sizes between 0.5 and 50 microns. For materials with special thermal
characteristics (such as heat sensitive materials), the Company also provides
cryogenic milling services, which use liquid nitrogen to chill materials to
extremely low temperatures. Company-manufactured equipment is typically used to
grind the chilled materials.
In addition, the Company offers its customers related polymer
processing services. These services include melt blending and mixing of plastics
and other additives, by way of extrusion, to form pellets (compounding); and
other processing, packaging, warehousing and distribution services that are
integrated with the Company's size reduction services. From time to time, the
Company also sells company-manufactured grinding equipment in the United States
and internationally.
The Company has six operating facilities in the United States, nine in
Europe, and two in Southeast Asia that provide size reduction services. The two
Southeast Asian facilities, which are located in New Zealand and Australia, were
acquired through the purchase of J.R. Courtenay (N.Z.) Ltd. (see
"Acquisitions"). The Company closed three of its domestic size reduction
facilities during fiscal years 1997 and 1998 in order to reduce costs and
capital expenditure requirements.
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Concentrate Manufacturing. The Company has three concentrate
manufacturing operations. Bayshore Industrial, Inc.'s facility, which is the
Company's primary operation, is in LaPorte, Texas. Two other operations were
acquired by the Company - Rotec Chemicals, Ltd., described below, whose Rushden,
England facility manufactures proprietary color concentrates, and Soreco S.A.
located in Oyonnax, France, which provides high quality color matching and color
compounding services for engineering plastics. The Company's concentrate
manufacturing operations involve the formulation and production of highly
concentrated compounds of additives which are then combined (by the Company or
by others) with petrochemical resins to produce materials having specifically
desired characteristics, such as anti-blocking (to prevent plastic film or
sheets from sticking together), flame-retardance, color, ultraviolet
stabilization, impact and tear resistance, or adhesion. The Company's
concentrates are produced to the detailed specifications of customers. These
customers primarily consist of companies that produce the additive-filled resins
used by others in fabricating finished products, as well as those companies that
make the finished plastic products. The concentrate manufacturing process
requires the combination of up to 25 different additives or fillers in precise
proportions. The Company is often approved as the manufacturer of such
concentrates following rigorous qualification procedures imposed by customers on
a product-by-product basis. The Company works closely with its concentrate
customers to research, develop and test the formulations necessary to create the
desired characteristics of the concentrates to be produced. Such concentrates
are produced in batches which may range from as little as five pounds (i.e., a
lab sample) to as large as four million pounds.
Distribution. In Europe and Southeast Asia, the Company is a leading
distributor of powders used in such applications as rotational molding,
carpet-backing, and powder coating. The Company also sells these powders in
Africa, South America, the Middle East, and Asia. The Company generally procures
the raw materials for its own account and adds value using its own formulations
and processes to produce the powders. Often, the Company utilizes both size
reduction and compounding technology to produce colored powders for its
distribution customers. The Company also supplies natural and dry-blended
colored powders. The Company has various supply agreements with resin producers
which provide for volume and pricing guarantees. These agreements are for
varying terms, generally are non-exclusive, and are subject to termination upon
short term notice by either party to the contract.
Petrochemical Processing Customers and Pricing. The primary customers
of the Company's petrochemical processing business segment are large producers
of petrochemicals (which include major chemical companies and petrochemical
production affiliates of major oil production companies), end users such as
rotational molders, and, in the case of the Company's domestic size reduction
business, polymer distributors. In size reduction services, the Company has many
customers, and no customer or particular type of customer is dominant. Worldwide
sales to one petrochemical processing customer (Dow Chemical Company and its
subsidiaries) accounted for 13% of the Company's consolidated revenues for the
year ended September 30, 1999. The Company has long-term contract arrangements
with many petrochemical processing customers whereby it has agreed to process or
manufacture certain petrochemical products for a single or multi-year term at an
agreed-upon fee structure.
The Company provides value-added services to customers in both its size
reduction service and concentrates manufacturing businesses. Within the
concentrates manufacturing business and in the European and Australian size
reduction businesses, the Company generally purchases and takes into inventory
the raw materials necessary to manufacture concentrates, and sells the
manufactured products at a product price. The Company seeks to minimize the risk
of price fluctuation in raw materials and other supplies by maintaining
relatively short order cycles, however, the purchase of raw materials into
inventory may expose the Company to increased risk
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of price fluctuations (see "Raw Materials and Backlog"). This contrasts with its
pricing in its domestic size reduction services, which are often performed on a
tolling basis and do not require the purchase of inventory.
Petrochemical Processing Sales and Marketing. The Company has
established a sales force of eleven full-time people dedicated to selling its
size reduction services and concentrate products in the United States. In
addition, the Company's European petrochemical processing operations have an
established sales force in Europe consisting of fifteen full-time individuals
located in The Netherlands, the United Kingdom, Italy, France, Belgium, Germany
and Scandinavia. The New Zealand and Australian operations have a combined sales
force of nine individuals.
Competition. The specialty petrochemical processing business is highly
competitive. Competition is based principally on price, quality of service,
manufacturing technology, proximity to markets, timely delivery and customer
service and support. The Company's size reduction competitors are generally
small and mid-sized companies which, overall, have fewer locations and a more
regional emphasis. Several companies also maintain significant size reduction
facilities for their own use. The Company believes that it has been able to
compete effectively in its market based on competitive pricing, its network of
plants, its technical expertise and equipment manufacturing capabilities and its
range of services, such as flexible storage, packaging facilities, and product
development. The Company also believes that its knowledge of the rotational
molding industry, through activities such as participation in the Association of
Rotational Molders, enhances its competitive position with this key customer
group. The Company's competitors in the concentrates industry include a number
of large enterprises, as well as small and mid-sized regional companies. The
Company believes its technical expertise, processing efficiency, high quality
product, customer support and pricing have enabled it to compete successfully in
this market.
The ambient size reduction business lacks substantial barriers to
entry, but cryogenic grinding and jet milling require a more significant
investment and greater expertise. The compounding business, including
concentrates manufacturing, requires a substantial investment in equipment, as
well as extensive technical and mechanical expertise. In general, many of the
Company's customers could perform the special petrochemical processing services
provided by the Company for themselves if they chose to do so, and new
competitors may enter the market from time to time. A number of the Company's
competitors and potential competitors in this segment have substantially greater
financial and other resources than the Company. While there can be no assurance,
the Company believes that it will be able to continue to compete effectively in
the industry, based on the factors described above.
OILFIELD SERVICES
The Company's inspection, reconditioning and coating services for new
and used tubular goods and sucker rods include exploration services, production
services and corrosion control services. These services include a variety of
processes designed to reduce the customer's cost of drilling and production. The
Company also sells equipment and supplies used in the inspection, reconditioning
and coating of tubular goods and sucker rods.
Tubular goods include various forms of casing, tubing, drill pipe and
line pipe. Casing is used to seal off fluids and prevent collapse of the bore
holes of oil and natural gas wells. After production casing is set, a string of
tubing is suspended from the surface inside the casing to serve as a conduit for
the extraction of oil and natural gas. Drill pipe is heavy seamless pipe used to
rotate the drill bit and circulate drilling fluids. Line pipe is used for waste
disposal lines, flow lines, gathering systems and pipelines through which oil,
natural gas and liquid hydrocarbons
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are transported. Removal of casing or tubing for repair or replacement is
expensive and results in an interruption of production and loss of revenues to
the well owner. Sucker rods are steel rods which are joined together in a
"string" by couplings to form a mechanical link from a downhole pump at the
bottom of an oil well to the pumping unit on the surface. Removal of a sucker
rod string for repair or replacement of rods, couplings or the downhole pump
requires a well to be shut down and the entire string of sucker rods to be
removed, resulting in additional expenses and loss of revenues to the well owner
due to interruption of production.
Exploration Services. The Company provides inspection services designed
to identify new tubular goods which are defective or which do not meet American
Petroleum Institute ("API") standards or other specifications set by the
customer. The API standards require pipe to be inspected to meet specified
standards and are generally employed as a benchmark in the petroleum industry.
Customers, however, generally require pipe to meet more rigorous standards.
These inspection services are used by the mills which manufacture pipe, pipe
suppliers and end users, such as oil and gas exploration and production
companies, as a quality assurance and control measure to reduce the costs
associated with defective tubular goods and to reduce the risk of downhole
failure, especially when drilling deep oil and natural gas wells with high
downhole temperatures and pressures and when drilling in environmentally
sensitive areas such as offshore waters. The Company operates its own inspection
facilities for new tubular goods which provide (in contrast to field inspection)
a controlled environment which permits more efficient and consistent inspection
procedures, facilitates supervision of personnel and electronic equipment and
avoids problems associated with inclement weather. The Company also performs,
under long-term contracts, inspection services on site at the manufacturing
plants of several major producers and processors of tubular goods thereby
reducing transportation and handling costs to the customer and provides mobile
inspection services in the field. The Company also manufactures inspection and
quality control equipment which is sold or leased from time to time to steel
producers and processors.
The Company provides its customers a "Full-Service One-Stop Program" by
offering a complete range of tubular services, including electro-magnetic
inspection ("EMI"), ultrasonic inspection ("UT"), tubular maintenance and
storage, inventory management, and associated services such as hydrostatic
testing and threading (API specification and premium threading services are
offered within the Company's Houston facility by third parties). EMI is a
process which identifies flaws through magnetic flux leakage and is generally
used on pipe of less than 500 mil. in thickness. The Company designed and uses
an EMI system, the AGS System II, which the Company believes is capable of
identifying and visually displaying natural and man-made flaws that are not
identifiable using conventional EMI methods. The AGS System II also
significantly reduces installation costs while still offering a vast improvement
in functionality over conventional methods. The Company also designed and uses a
UT system, the ICO Scan system, which identifies flaws which are virtually
undetectable by other means, employing high frequency sound waves, and is used
to inspect pipe that is thicker than pipe which EMI can effectively inspect or
which contains alloys of metals other than steel, such as titanium. During
fiscal 1999, the Company received and installed a field-tested, high-speed, full
length ultrasonic inspection unit in the Company's Houston, Texas pipe
inspection facility. The Company intends to actively market the services
provided by this unit during fiscal 2000.
Production Services. The Company reconditions and inspects used tubular
goods and new and used sucker rods through the provision of a complete package
of inspection and maintenance services. These services include the testing,
cleaning, reconditioning and electronic inspection of tubular goods. These
services are performed in a controlled environment at the Company's facilities
(providing many of the advantages previously described for in-plant inspection
of new tubular goods) as well as at the well site, using mobile equipment.
Production services reduce the customer's well operating costs because
reconditioning used tubular goods is typically less expensive than purchasing
new tubular goods. Reconditioned tubular goods generally must meet the same API
or customer
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standards as new tubular goods. The Company performs these services at ten
Company facilities located in California, Mississippi, New Mexico, North Dakota,
Oklahoma, Texas (two locations), Wyoming and Canada (two locations).
The Company reconditions and inspects new and used sucker rods. Using
the Company's patented computerized sucker rod inspection system, reconditioning
involves a number of steps designed to clean, straighten, inspect and apply
protective coating to sucker rods to guard against corrosion. This process
reduces the customer's well operating costs because reconditioning used sucker
rods is less expensive than purchasing new sucker rods. The Company also
inspects new sucker rods before they are placed in service to reduce the risk of
downhole failure, which requires expensive pulling services and results in loss
of production. The Company's sucker rod reconditioning and inspection services
are provided at seven Company facilities located in California, Oklahoma, Texas
(three locations), Wyoming and Canada.
The Company provides a service which allows customers to acquire
reconditioned tubular goods or sucker rods at a lower cost than new tubular
goods or sucker rods, decrease their inventory carrying cost, and enhance their
inventory management. With this program, the Company purchases used tubular
goods and sucker rods from certain customers, reconditions and grades the pipe
and sucker rods for varying degrees of usage and resells the pipe and sucker
rods in the marketplace.
The Company also operates mobile inspection units utilizing a system
known as Wellhead Scanalog(TM). The Company acquired the rights to Wellhead
Scanalog for use in the United States pursuant to a non-exclusive, royalty-free
license acquired in 1992. Wellhead Scanalog units are designed to perform
tubular inspection while the tubing is being removed from the well without
interfering with the normal operation of the rig. The Company believes Wellhead
Scanalog inspection is unique because it is not affected by scale, mud, paraffin
or water, which can inhibit the operation of other systems.
Corrosion Control Services. The Company's corrosion control services
are designed to reduce well operating costs by extending the useful life of
downhole tubular goods and sucker rods and by improving the well's hydraulic
efficiency and pipe integrity. Corrosive conditions exist inside most wells.
Such conditions are particularly extreme in high temperature gas wells and in
oil producing regions where secondary and tertiary recovery techniques are
utilized. Secondary and tertiary recovery techniques are methods by which
natural forces in an oil reservoir are supplemented by means such as water
flooding to increase ultimate oil recovery. The Company offers a variety of
corrosion control services to its customers, using several of the Company's
patented processes. In late fiscal 1999, the Company developed a new coating
product called RotoCoat. This coating is used for low-temperature, highly
abrasive environments and was developed in conjunction with the Company's
petrochemical business. The Company has filed a patent application for this
product.
The Company performs internal coating of new and used tubular goods
with a variety of powder and liquid coatings. In the coating process, tubular
goods are placed in large burnout ovens to remove foreign substances. The
tubular goods are then grit blasted, primed with phenolic, preheated, coated
internally and subjected to a final baking process. The tubular goods are then
inspected visually and electronically to make certain the coating uniformly
covers the entire interior of the pipe and meets the Company's quality assurance
specifications. A similar process is utilized for cleaning, priming and coating
tubular couplings. The selection of the proper coating for downhole tubular
goods requires specialized knowledge and considerable effort by the Company's
experienced coating managers and technicians. The key to the process is
gathering facts concerning the well, its environment, test procedures and
related conditions planned for the life of the well. The Company has five
coating facilities located in Louisiana, Texas (three locations) and Canada.
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The Company's patented sucker rod coating process involves applying a
special formula stainless steel to the sucker rods and then coating them with a
phenolic primer and fusion bonded modified epoxy. Sucker rods used in less
corrosive conditions may be coated only with phenolic primer and fusion bonded
modified epoxy. The Company's sucker rod coating services are provided at its
facility in Odessa, Texas.
The Company also provides internal cement lining for pipe ranging in
size from small diameter tubing to 24-foot line pipe. Cement provides an
increased barrier between corrosive fluids and the tubular product which allows
the customer to use a larger portion of its used pipe with a welded connection,
when weight and torsion strength are not a primary issue. For critical line
pipe, the Company also applies an external fusion bonded tape which forms a
tough protective corrosion barrier.
Oilfield Services Customers. The Company's customers include leading
integrated oil companies, large independent oil and gas exploration and
production companies, drilling contractors, steel producers and processors, and
oilfield supply companies. No single customer of the oilfield services business
segment accounted for over 10% of the Company's consolidated revenues in fiscal
1997, 1998 or 1999. Sales are generally on an order-by-order basis or under
short-term contracts (i.e., one year or less). The Company does enter into
contracts in connection with the placement of Company owned equipment in tubular
goods manufacturing or processing facilities. These contracts are generally for
three or more years and in some instances provide for fixed prices, volume
discounts and indemnification of customers for certain liabilities.
Oilfield Services Sales and Marketing. The Company's oilfield services
are marketed by 26 individuals who are responsible for in-depth customer contact
and service knowledge. Oilfield service sales representatives are required to be
technically knowledgeable in reclamation, inspection and corrosion control
services, and to stay abreast of regional and industry-wide trends in oil and
gas exploration, completion and production.
Competition. The principal competitive factors in the Company's
oilfield services business are price, availability and quality of service.
Although the consolidation in the tubular inspection, reconditioning and coating
industry has resulted in the elimination of many of the Company's competitors,
the Company's ability to compete effectively is dependent upon timely, reliable
performance and quality of its services at competitive rates. The Company
believes that it has been able to compete effectively because of its efficient
and cost-effective processes, the strong relationships which it maintains with
its customers, and its ability to add value through integration of services such
as tubular inspection, maintenance, storage and inventory control.
The Company believes few competitors within the United States provide
as wide a variety of tubular services as those offered by the Company. The
Company and Tuboscope, Inc. compete with each other and a number of smaller
companies in most domestic markets. Unlike the Company's corrosion control
business, capital and other requirements for entry into the tubular inspection
business are relatively low and new competition may enter the market from time
to time. Potential entrants may have substantially greater financial or other
resources than the Company. While there can be no assurance, the Company
believes it will be able to compete effectively in the industry, based on the
factors described above.
ACQUISITIONS
From the beginning of fiscal 1994 through the end of fiscal 1999, the
Company completed and integrated eleven acquisitions in the oilfield services
segment which increased its market share and expanded its service capabilities.
In April 1996, the Company entered the petrochemical processing industry through
the acquisition of Wedco Technology, Inc. ("Wedco") to take advantage of
opportunities in that market. Since the Wedco
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acquisition, the Company has completed nine additional acquisitions in the
petrochemical processing industry. The acquisitions the Company has completed
during the last three fiscal years are discussed below and were accounted for
using the purchase method of accounting and, as such, the results of operations
of the acquired entities are included in the Company's consolidated results of
operations only from the date of each acquisition forward.
During February 1999, the Company acquired MilCorp Holdings, Inc. and
MilCorp Industries, Ltd. (collectively "MilCorp") for $7,653 in cash and the
assumption of approximately $4,144 of debt. MilCorp is a leading provider of
fully integrated services for oil country tubular goods, including trucking,
inventory management, inspection and internal coating. MilCorp has facilities
located on 160 acres near Edmonton, Alberta, in the energy-producing region of
Western Canada. MilCorp has been in business for more than fifty years and its
customers include many of Western Canada's large energy companies and drilling
contractors.
During June 1998, the Company acquired Soreco S.A. ("Soreco") and its
wholly owned subsidiary for approximately $1,600 in cash and the assumption of
approximately $236 in debt. Soreco, which is strategically located in the French
"Plastics Valley", provides high-quality color matching and color compounding
services for engineering plastics. Soreco's customer base includes manufacturers
of consumer products such as appliances, electronics, cosmetics and other
products which require colors with high consistency. Soreco uses sophisticated
single pigment coloration techniques to provide rapid turnaround for color
matching and compounding services and has an extensive library of proprietary
color formulations.
During March 1998, the Company acquired J.R. Courtenay (N.Z.) Ltd.
("JRC") and its wholly owned subsidiary, Courtenay Polymers Pty. Ltd. ("CPPL"),
for $14,124 in cash and the assumption of approximately $500 in debt. JRC and
CPPL are located in Auckland, New Zealand and Melbourne, Australia,
respectively, and are leading providers of polymer powders to the rotational
molding and metal coating industries in New Zealand and Australia. These
companies sell an extensive line of materials using proprietary formulations
under the Cotene(TM) brand name and also provide a complete range of size
reduction and compounding services.
During December 1997, the Company acquired the operating assets of
Curley's Inspection Service, Inc. ("Curley's"). The consideration consisted of
$2,000 in cash and is subject to adjustment based upon future operating
revenues. Curley's provides drill pipe and casing inspection services from
locations in Texas and New Mexico.
During September 1997, the Company acquired the operating assets of
NSpection Systems, Inc. ("NSpection") for $600 in cash and future payments based
on sales. Nspection provides electromagnetic inspection and related services for
new and used tubing, casing and drill pipe utilizing two locations in Houston,
Texas.
During July 1997, the Company acquired Verplast S.p.A. ("Verplast"),
which included Tec-Ma Srl, a wholly owned subsidiary of Verplast, for a total
consideration of approximately $35,100, consisting of approximately $18,700 in
cash and the effective assumption of $16,400 in total liabilities. Verplast and
Tec-Ma, both located in northern Italy, are suppliers of petrochemical
processing services and value-added plastic materials for the rotational molding
market and for other plastic powder applications.
During May 1997, the Company acquired the remaining 50% ownership of
Micronyl-Wedco S.A. ("Micronyl") not already owned by the Company for a total
consideration of approximately $7,600, consisting of approximately $2,600 in
cash and the effective assumption of $5,000 in total liabilities. Wedco France,
as this entity is now known, operates two size reduction facilities in France
which perform services similar to those performed by the Company's other
petrochemical size reduction facilities.
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During April 1997, the Company acquired Rotec Chemicals, Ltd. ("Rotec")
for a total consideration of approximately $7,800, consisting of approximately
$2,500 in cash, 427,353 shares of Company common stock valued at approximately
$2,100 and the effective assumption of $3,200 in total liabilities. In addition,
Rotec shareholders may be entitled to additional consideration in cash and
Company common stock based on future earnings of Rotec. Rotec serves the United
Kingdom, Ireland and Continental Europe markets and is a producer of high
quality concentrates for a variety of plastics processes.
During April 1997, the Company acquired the micropowders business of
Exxon Chemical Belgium (the "Micropowders Business"). The consideration
consisted of an initial payment of $500 and five additional payments of Dutch
Guilders ("Dfl") 674 ($326 at September 30, 1999 exchange rates) payable for
each of five years beginning one year after the acquisition date. As of
September 30, 1999, Dfl 2,024 ($978 at September 30, 1999 exchange rates)
remains outstanding. The Company also purchased inventory from Exxon Chemical
Belgium and entered into a supply agreement with Exxon Chemical Holland to
acquire inventories in the future.
During December 1996, the Company acquired Bayshore Industrial, Inc.
("Bayshore") for a total consideration of approximately $18,500, consisting of
approximately $6,900 in cash, 1,285,012 shares of Company common stock valued at
approximately $5,900 and the effective assumption of $5,700 in total
liabilities. Bayshore is a provider of concentrates and compounds to resin
producers in the United States.
ENVIRONMENTAL REGULATION
The Company is subject to numerous and changing local, state, federal
and foreign laws and regulations concerning the use, storage, treatment,
disposal and general handling of hazardous materials, some of which may be
considered to be hazardous wastes, and restrictions concerning the release of
pollutants and contaminants into the environment. These laws and regulations may
require the Company to obtain and maintain certain permits and other
authorizations mandating procedures under which the Company must operate and
restrict emissions. Many of these laws and regulations provide for strict joint
and several liability for the costs of cleaning up contamination resulting from
releases of regulated materials into the environment. Violation of mandatory
procedures under operating permits may result in fines, remedial actions or, in
more serious situations, shutdowns or revocation of permits or authorizations.
The Company believes that future compliance with existing laws and regulations
will not have a material adverse effect on the Company. The Company further
believes that future capital expenditures for environmental remediation will not
be material.
The Company regularly monitors and reviews its operations, procedures
and policies for compliance with environmental laws and regulations and the
Company's operating permits. The Company believes that its current procedures
and practices in its operations, including those for handling hazardous
materials, are substantially in compliance with all material environmental laws
and regulations and its material operating permits. There can be no assurance,
however, that a review of the Company's past, present or future operations by
courts or federal, state, local or foreign regulatory authorities will not
result in determinations that could have a material adverse effect on the
Company. In addition, the revocation of any of the Company's material operating
permits, the denial of any material permit application or the failure to renew
any interim permit, could have a material adverse effect on the Company. While
the Company cannot predict what environmental laws and regulations will be
enacted or adopted in the future or how such future laws or regulations will be
administered or interpreted, it believes the impact of any such laws or
regulations is not likely to be more burdensome to the Company than to other
similarly situated companies involved in oilfield services or petrochemical
processing. Compliance with more stringent environmental laws and regulations,
more vigorous enforcement policies, or stricter interpretations of current laws
and regulations, or the occurrence of an industrial accident, could have a
material adverse effect on the Company.
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INSURANCE AND RISK
Except for warranties implied by law, the Company does not generally
warrant the tubular goods or sucker rods it inspects or the specialty
petrochemical processing services it provides. Nonetheless, if the Company were
found to have been negligent, or to have breached its obligations to its
customers, the Company could be exposed to significant liabilities and its
reputation could be adversely affected. Likewise, the Company's activities as a
vendor of inspection equipment, a reseller of tubular goods and a manufacturer
of specialty petrochemical products, may result in liability on account of
defective products. The Company believes these risks of its business are
adequately covered by its insurance program. However, such coverage is subject
to applicable deductibles, exclusions, limitations on coverage and policy
limits. In addition, the occurrence of a significant adverse event, the risks of
which are not fully covered by insurance, could have a material adverse effect
on the Company's financial condition, results of operations or net cash flows.
Moreover, no assurance can be given that the Company will be able to maintain
adequate insurance in the future at rates it considers reasonable.
RAW MATERIALS AND BACKLOG
The Company purchases and takes into inventory the resins, additives
and other materials used in its concentrates manufacturing, distribution and a
portion of its specialty petrochemical distribution business. These materials
are subject to fluctuating availability and prices. The Company believes that
other materials used in its operations are available from numerous sources and
are available to meet its needs. The Company believes that backlogs are not
meaningful to the Company's operations.
PATENTS AND LICENSES
The Company holds eleven United States patents, two United Kingdom
patents, two Australia/New Zealand patents, and has twenty patent applications
pending covering the proprietary technology utilized in its reconditioning,
inspecting, spraymetal and epoxy coating of sucker rods and its services for
used tubular goods. The expiration dates on these patents range from January
2000 to October 2017. The Company has one patent application pending covering
proprietary technology utilized by its plastics compounding business in the
petrochemical processing operations. The Company's petrochemical processing
operations are not materially dependent upon any patents or trademarks. The
Company believes that its patents and licenses are valid and that the duration
of its existing patents is satisfactory. However, no assurance can be given that
one or more of the Company's competitors may not be able to develop or produce a
process or system of comparable or greater quality to those covered by the
Company's patents or licenses, that patents will issue in respect to filed
patent applications, that the Company's patents will not be found to be invalid
or that others will not claim that the Company's operations infringe upon or use
the intellectual property of others. In addition, issued patents may be modified
or revoked by the United States Patent and Trademark Office or in legal
proceedings. The Company does not believe any single patent is essential to the
overall successful operation of the Company's business.
In connection with the acquisition of Baker Hughes Tubular Services
during fiscal 1992, the Company acquired royalty-free non-exclusive licenses to
use Wellhead Scanalog(TM), PipeImage(TM) and other proprietary technology in the
United States. Pursuant to the terms of such licenses, the Company generally is
prohibited from using such proprietary technology in foreign markets.
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EMPLOYEES
As of November 30, 1999, the Company had approximately 1,705 full-time
employees, and approximately 337 full-time contract employees. The Company's
employees working in the Netherlands, Italy, New Zealand and Australia are
parties to collective bargaining agreements. None of the other employees are
represented by a union. The Company has experienced no strikes or work stoppages
during the past fiscal year and considers its relations with its employees to be
satisfactory.
ITEM 2. PROPERTIES
The location and approximate acreage of the Company's operating
facilities at December 10, 1999, together with an indication of the services
performed at such facilities are set forth below.
OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
Houston, Texas........................... Corporate headquarters N/A 2001
OILFIELD SERVICES
Bakersfield, California.................. Sucker rod reconditioning and inspecting 29 Owned
Amelia, Louisiana........................ Internal coating and inspection of new and used
tubular goods 61 2001
Amelia, Louisiana........................ Internal coating and inspection of new and used
tubular goods 23 2003
Broussard, Louisiana..................... Drill pipe inspection 17 Owned
Brookhaven, Mississippi.................. Inspection of tubular goods 12 2001
Farmington, New Mexico................... Inspection of new and used tubular goods 14 2002
Farmington, New Mexico................... Storage and inspection of new and used tubular
goods 10 2004
Williston, North Dakota.................. Used tubular goods services 2 2002
Oklahoma City, Oklahoma.................. Sucker rod reconditioning and inspecting 8 Owned
Oklahoma City, Oklahoma.................. Inspection of new and used tubular goods 17 Owned
Corpus Christi, Texas.................... Inspection of new and used tubular goods 10 Owned
Denver City, Texas....................... Sucker rod reconditioning and inspecting 10 Owned
Houston, Texas........................... Inspection of new tubular goods 192 Owned
Houston, Texas........................... Internal coating of tubular goods 49 Owned
Houston, Texas........................... Internal research and development 5 2002
Lone Star, Texas......................... Inspection of new tubular goods 80 Owned
Lone Star, Texas......................... Inspection of new tubular goods N/A Mo.-to-mo.
Monahans, Texas.......................... Inspection of new and used tubular goods 17 2002
Odessa, Texas............................ Sucker rod reconditioning and inspecting 13 (1)
Odessa, Texas............................ Sucker rod storage 7 Owned
Odessa, Texas............................ Spraymetal and epoxy coating of sucker rods 3 Owned
Odessa, Texas............................ Used tubular goods services 13 Owned
Odessa, Texas............................ Internal coating of tubular goods 15 Owned
Odessa, Texas............................ Trucking yard 14 Owned
Odessa, Texas............................ Used tubular goods services 22 Owned
Odessa, Texas............................ Storage facility 22 Owned
Odessa, Texas............................ Cement lining/external coating 20 (2)
Odessa, Texas............................ Equipment manufacturing and repair 9 Owned
Casper, Wyoming.......................... Sucker rod reconditioning and inspecting; inspection
of new and used tubular goods 40 (3)
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OWNERSHIP
OR LEASE
LOCATION SERVICES ACRES EXPIRATION
-------- -------- ----- ----------
Edmonton, Alberta, Canada................ Inspection of new and used sucker rods;
sales and service of new and used oilwell engines 10 2005
Nisku, Alberta, Canada................... Oilfield tubular goods - trucking, coating, inspecting
and inventory management 155 Owned
PETROCHEMICAL PROCESSING SERVICES
Fontana, California...................... Size reduction 7 Owned
Maywood, Illinois........................ Idle facility 3 Owned
Ottawa, Illinois......................... Supplier and processor of filler, extender and
chemical processing minerals 3 2008
East Chicago, Indiana.................... Size reduction 4 Owned
Bloomsbury, New Jersey................... Size reduction 15 Owned
Grand Junction, Tennessee................ Size reduction 5 Owned
China, Texas............................. Size reduction 13 Owned
LaPorte, Texas........................... Concentrate manufacturing and compounding
facility 39 Owned
Lovelady, Texas.......................... Size reduction 1 2000
Lovelady, Texas.......................... Size reduction 24 Owned
Melbourne, Australia..................... Size reduction, compounding and distributing 1 2004
Gainsborough, England.................... Size reduction 8 Owned
Rushden, England......................... Concentrate and compounding facility 1 2008
Beaucaire, France........................ Size reduction 5 Owned
Montereau, France........................ Size reduction 4 Owned
Oyonnax, France.......................... Compounding 1 Owned
Verolanuova, Italy....................... Size reduction, compounding and distributing 5 (4)
Verdellino, Italy........................ Size reduction, compounding and distributing 1 2001
's-Gravendeel, The Netherlands........... Size reduction 5 Owned
Auckland, New Zealand.................... Size reduction, compounding and distributing 1 2004
Stenungsund, Sweden...................... Size reduction 1 2007
(1) Three acres are leased on a month-to-month basis; the remaining ten
acres are owned by the Company.
(2) Eighteen acres are owned; the remaining two acres are leased on a
month-to-month basis.
(3) Seventeen acres are owned; twenty-one acres are leased through 2003;
remaining two acres are leased on a month-to-month basis.
(4) The facility is owned with the exception of one building which is
leased through 2000.
The Company considers its facilities and equipment to be well
maintained and adequate for the Company's present operations. The Company also
leases various sales and administrative offices with various lease expiration
dates through 2002. Utilization of the Company's oilfield service facilities is
subject to fluctuations based in part on oil and gas exploration and production
levels. The Company is currently operating most of its facilities in the
oilfield services business below full capacity. Most oilfield facilities are
operating no more than one shift per day, while most of the petrochemical
facilities are operating two or more shifts per day.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a named defendant in seven cases involving seven
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. (The cases, all of which are pending in Texas state
courts, were initiated on May 13, 1991; November 21, 1991; August 26, 1992; June
29, 1995; August 15, 1995; July 23, 1997; and June 1, 1999). For the most part,
the Company is generally protected under worker's compensation law from claims
under these suits except to the extent a judgment is awarded against the Company
for intentional tort. The standard of liability applicable to all except one of
the Company's pending cases is intentional tort, a stricter standard than the
gross negligence standard applicable to wrongful death cases. The Company
currently has no pending cases in which wrongful death is alleged. Although one
suit against the Company involves negligence claims that, in theory, could
circumvent the Company's immunity protections under the workers' compensation
law, even if such circumvention occurred, the Company believes that this
litigation, referred to as the Roark litigation, should not have a material
adverse effect on the financial condition, results of operations and/or cash
flow of the Company. As described in more detail below, the Roark litigation
names the Company and Baker Hughes, Inc. ("Baker Hughes"), among others, as
defendants and falls within the provisions of an agreement between the Company
and Baker Hughes that limits the Company's obligations in the litigation.
In fiscal 1993, the Company settled two other suits, both of which
alleged wrongful death caused by silicosis-related diseases, which resulted in a
total charge of $605. In 1994, the Company was dismissed without liability from
two suits alleging intentional tort against the Company for silicosis-related
disease. In 1996, the Company obtained a non-suit in two other intentional tort
cases and in early 1997 was non-suited in an additional tort case. During the
second quarter of fiscal 1998, three cases involving alleged silicosis-related
deaths were settled. The Company was fully insured for all three cases and, as a
result, did not incur any settlement costs. During the second quarter of fiscal
1998, the Company was non-suited in one intentional tort case, and during the
fourth quarter of fiscal 1998, the Company was non-suited in two additional tort
cases. During the second quarter of fiscal 1999, the Company was non-suited in
one intentional tort case, and during the fourth quarter of fiscal 1999, the
Company was non-suited in an additional intentional tort case. The Company and
its counsel cannot at this time predict with any reasonable certainty the
outcome of any of the remaining suits or whether or in what circumstances
additional suits may be filed. Except as described below, the Company does not
believe, however, that such suits will have a material adverse effect on its
financial condition, results of operations or cash flows. The Company has in
effect in some instances general liability and employer's liability insurance
policies applicable to the referenced suits; however, the extent and amount of
coverage is limited and the Company has been advised by certain insurance
carriers of a reservation of rights with regard to policy obligations pertaining
to the suits because of various exclusions in the policies. Except for the Roark
litigation, if an adverse judgment is obtained against the Company in any of the
referenced suits which is ultimately determined not to be covered by insurance,
the amount of such judgment could have a material adverse effect on the
financial condition, results of operations and/or cash flows of the Company.
The Company's agreement with Baker Hughes, pursuant to which Baker
Hughes Tubular Services ("BHTS") was acquired by the Company, provides that
Baker Hughes will reimburse the Company for 50% of the BHTS environmental
remediation costs in excess of $318, with Baker Hughes' total reimbursement
obligation being limited to $2,000 (current BHTS obligation is $1,650). BHTS is
a responsible party at two hazardous waste disposal sites that are currently
undergoing remediation pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"). Under CERCLA, persons who were
responsible for generating the hazardous waste disposed of at a site where
hazardous substances are being released into the environment are jointly and
severally liable for the costs of cleaning up environmental contamination, and
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injuries and property damage allegedly
13
16
caused by hazardous substances released into the environment. The two sites
where BHTS is a responsible party are the French Limited site northeast of
Houston, Texas, and the Sheridan site near Hempstead, Texas. Remediation of the
French Limited site has been completed, with only natural attenuation of
contaminants in groundwater occurring at this time. Remediation has not yet
commenced at the Sheridan site. Current plans for cleanup of this site, as set
forth in the federal Record of Decision, call for on-site bioremediation of the
soils in tanks and natural attenuation of contaminants in the groundwater.
However, treatability studies to evaluate possible new remedies for the soils,
such as in-place bioremediation, are being conducted as part of a Remedial
Technology Review Program. Based on the completed status of the remediation at
the French Limited site and BHTS's minimal contribution of wastes at both of the
sites, the Company believes that its future liability under the agreement with
Baker Hughes with respect to these two sites will not be material.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992. The
agreement stipulates that with regard to future occupational health claims, the
parties shall share costs equally with the Company's obligations being limited
to $500 for each claim and a maximum contingent liability of $5,000 ($4,500 net
of current accruals) in the aggregate, for all claims. This agreement governs
the Company's liability with respect to the Roark litigation, which involves
occupational health claims arising out of Roark's employment at BHTS. Based on
the limitation on the Company's obligations provided for in the agreement, the
Company does not believe the Roark litigation will have a material adverse
effect on the financial condition, results of operations and/or cash flow of the
Company.
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13,000 in the
trial of its case against John Wood Group PLC relating to the 1994 contract for
the purchase of the operating assets of NDT Systems, Inc. and certain related
entities. The court subsequently entered a judgment for $15,750 in the Company's
favor, which includes pre-judgment interest on the jury award. The Company is
also entitled to post-judgment interest. The Wood Group is currently appealing
the judgment and has posted a bond for the entire amount of the judgment. This
award has not been reflected in the Company's balance sheet or operating
results. The Company was represented on a contingency fee basis, and its
attorneys will receive a portion of the amount awarded to the Company.
Into the third fiscal quarter of 1999, Wedco was a plaintiff and a
counterclaim defendant, and the Company was a third party defendant in a lawsuit
filed on February 16, 1996 by Wedco against Polyvector Corporation
("Polyvector"), John Lefas, the principal shareholder of Polyvector, and Fred
Feder, a former director of Wedco, which was pending in the federal district
court for the District of New Jersey (the "New Jersey Action"). A proceeding
initiated on June 25, 1998 had been brought in the Ontario Court (General
Division) by WedTech Inc. and Polyvector against the Company and others for
damages and other relief (the "Canadian Action"). During the second fiscal
quarter of 1999, the parties to the New Jersey Action and the Canadian Action
reached an agreement that settled all outstanding issues in both actions. During
the third fiscal quarter of 1999, the parties entered into a settlement that
brought an end to the New Jersey Action and the Canadian Action. The terms
of the settlement will not have a material adverse effect on the Company's
financial condition.
ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made on August 7, 1998,
by Oil Country Tubular Limited ("OCTL"), a company based in India. OCTL alleges
that its claim, which it has brought in the Court of Arbitration of the
International Chamber of Commerce; arises in connection with a Foreign
Collaboration Agreement entered into between it and Baker Hughes Tubular
Services, Inc., a corporation whose name was changed to ICO Tubular Services,
Inc. after acquisition by the Company in 1992. OCTL claims, among other items,
that it did not receive technical
14
17
assistance, spare parts, and certain raw materials necessary for its oilfield
tubular services plant in India. OCTL seeks damages in excess of $96,000,
calculated in part based on lost profit projections over a number of years, from
ICO Tubular Services, Inc. and its co-respondent, Baker Hughes Incorporated
("BHI"). The Company had only peripheral knowledge of the dispute between OCTL
and BHI prior to the filing of OCTL's claim. The arbitration proceeding is at an
early stage, with answers to OCTL's claim having been filed in November 1998. A
hearing on the Company's objection to the arbitration tribunal's jurisdiction
over the Company (and the objection to jurisdiction made by BHI) was held in
London on October 5-7, 1999. The arbitration tribunal has not yet ruled on this
issue. Regardless of the liability facts, about which the Company has no
knowledge at this point, the Company believes the damage claim is exaggerated.
While the outcome of this arbitration matter cannot be predicted, the Company
plans to contest the claims vigorously.
The Company is also named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition, cash flows or results of operations.
15
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the NASDAQ Stock Market under the
symbol ICOC. There were approximately 910 shareholders of record of the
Company's common stock at December 10, 1999.
During fiscal year 1997, the Company declared and paid a common
dividend of $.05 the first quarter and $.055 for the remaining three quarters
for a total of $.215 per share during the year. During fiscal year 1998, the
Company declared and paid common dividends of $.055 per share, per quarter for a
total of $.22 per share during the year. During the first quarter of fiscal year
1999, the Company declared a $.055 per common share dividend. For the remainder
of fiscal 1999 and during the first quarter of fiscal year 2000, the Company has
not declared or paid a common dividend. The Company currently has no plans to
reinstate the common stock dividend.
The Company's agreement relating to the Senior Notes due 2007 restricts
the Company's ability to pay dividends on preferred and common stock. The terms
of the Senior Notes, however, do allow for dividend payments on currently
outstanding preferred stock, in accordance with the terms of the preferred
stock, and up to $.22 per share, per annum on common stock, in the absence of
any default or event of default on the Senior Notes. The above limitations may
not be decreased, but may be increased based upon the Company's results of
operations and other factors (see Note 7 to the Company's Consolidated Financial
Statements).
The following table sets forth the high and low sales prices for the
common stock as reported on the NASDAQ Stock Market.
HIGH LOW
---- ---
1998 First Quarter 8 3/16 5 15/16
Second Quarter 6 1/8 4 9/16
Third Quarter 5 1/8 3 15/16
Fourth Quarter 4 7/16 2 5/16
1999 First Quarter 3 1/2 1 15/16
Second Quarter 2 7/32 27/32
Third Quarter 1 5/8 1
Fourth Quarter 2 3/8 1 3/16
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ITEM 6. SELECTED FINANCIAL DATA(1)
The following table sets forth selected financial data of the Company
which has been derived from consolidated financial statements that have been
audited by PRICEWATERHOUSECOOPERS LLP, independent accountants. The selected
financial data should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto, included elsewhere in this report.
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
(In thousands, except share data)
STATEMENT OF OPERATIONS DATA:
Net revenues .................................................. $ 262,373 $ 281,343 $ 198,042 $ 108,350 $ 87,887
Cost of sales and services .................................... 201,644 211,856 141,302 75,572 59,989
----------- ----------- ----------- ----------- ----------
Gross profit .................................................. 60,729 69,487 56,740 32,778 27,898
Selling, general and administrative expenses .................. 42,158 45,022 31,981 21,108 17,736
Depreciation and amortization ................................. 17,074 15,389 11,349 7,230 5,112
Impairment of long-lived assets ............................... 9,291 -- -- 5,025 --
Write-off of fixed assets ..................................... 3,420 -- -- -- --
Severance expenses ............................................ 2,499 -- -- -- --
Non-recurring compensation arrangements ....................... -- -- -- 1,812 --
Write-off of start-up costs ................................... 867 -- -- -- --
----------- ----------- ----------- ----------- ----------
Operating income (loss) ....................................... (14,580) 9,076 13,410 (2,397) 5,050
Interest income ............................................... 1,921 3,771 2,001 1,277 1,424
Interest expense .............................................. 13,831 13,819 5,765 669 117
Gain on sale of equity investment ............................. -- 11,773 -- -- --
Other income (expense) ........................................ (51) (20) 602 97 --
----------- ----------- ----------- ----------- ----------
Income (loss) before income taxes and extraordinary item ...... (26,541) 10,781 10,248 (1,692) 6,357
Income taxes (benefit) ........................................ (6,439) 4,775 4,150 (632) 567
----------- ----------- ----------- ----------- ----------
Income (loss) before extraordinary item ....................... (20,102) 6,006 6,098 (1,060) 5,790
Extraordinary gain ............................................ 399 -- -- -- --
----------- ----------- ----------- ----------- ----------
Net income (loss) ............................................. (19,703) 6,006 6,098 (1,060) 5,790
Preferred dividends ........................................... (2,176) (2,176) (2,176) (2,178) (2,176)
----------- ----------- ----------- ----------- ----------
Net income (loss) available for Common Shareholders ........... $ (21,879) $ 3,830 $ 3,922 $ (3,238) $ 3,614
=========== =========== =========== =========== ==========
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per share before extraordinary item ..... $ (1.01) $ .18 $ .19 $ (.24) $ .41
Basic earnings (loss) per share ............................... $ (.99) $ .18 $ .19 $ (.24) $ .41
Diluted earnings (loss) per share before extraordinary item ... $ (1.01) $ .17 $ .19 $ (.24) $ .41
Diluted earnings (loss) per share ............................. $ (.99) $ .17 $ .19 $ (.24) $ .41
Cash dividends per share declared on Common Stock ............. $ .06 $ .22 $ .22 $ .20 --
Weighted average shares outstanding (basic) ................... 22,113,000 21,877,000 20,918,000 13,328,000 8,709,000
Weighted average shares outstanding (diluted) ................. 22,133,000 22,004,000 21,144,000 13,493,000 8,770,000
OTHER FINANCIAL DATA:
EBITDA (2) .................................................... $ 18,571 $ 24,465 $ 24,759 $ 12,538 $ 10,162
Ratio of EBITDA to interest expense (3) ....................... 1.3x 1.8x 4.3x 18.7x 86.9x
Ratio of EBITDA to interest expense net of interest income
(3)(5) ...................................................... 1.6x 2.4x 6.6x -- --
Capital expenditures (4) ...................................... $ 15,333 $ 26,143 $ 15,747 $ 8,712 $ 5,838
Common stock dividends ........................................ $ 1,216 $ 4,823 $ 4,559 $ 2,830 $ --
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AS OF SEPTEMBER 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(In thousands)
BALANCE SHEET DATA:
Cash and equivalents................................... $ 37,439 $ 51,135 $ 83,892 $ 13,414 $ 24,991
Working capital........................................ 70,202 89,220 110,289 29,882 37,284
Property, plant & equipment, net....................... 114,586 117,299 97,779 72,585 29,824
Total assets........................................... 299,835 328,677 321,753 162,172 88,183
Long-term debt, net of current portion................. 139,652 132,631 133,034 15,422 1,047
Shareholders' equity................................... 102,950 128,316 127,138 120,594 74,471
- -----------------
(1) The Statement of Operations, Balance Sheet and Other Financial Data include
the results of operations and financial position of the Company and each of
the companies acquired since their respective dates of acquisition. See
discussion of fiscal year acquisitions in Item 1.
(2) "EBITDA" equals gross profit less selling, general and administrative
expenses and should not be considered as an alternative to net income or
any other generally accepted accounting principles measure of performance
as an indicator of the Company's operating performance or as a measure of
liquidity. The Company believes EBITDA is a widely accepted financial
indicator of a company's ability to service debt. Because EBITDA excludes
some, but not all items that affect net income, such measure varies among
companies and may not be comparable to EBITDA as used by other companies.
(3) Ratios of EBITDA to interest expense and interest expense net of interest
income represent ratios which provide investors with information as to the
Company's current ability to meet its interest costs.
(4) Consists of cash used for capital expenditures, excluding property, plant
and equipment obtained in acquisitions.
(5) The ratio has not been presented for 1996 and 1995 as the Company incurred
net interest income.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The Company's net revenues through fiscal year 1998 increased due to a
variety of factors, including acquisitions and, in many cases, increased sales
volumes in both existing and acquired business lines. During fiscal year 1999,
net revenues declined largely due to a decrease in demand for the Company's
oilfield services.
The Company's revenue is classified within two operating segments:
petrochemical processing and oilfield services. Petrochemical processing
revenues are derived from (1) distributing plastic powders, (2) grinding
petrochemicals into powders (size reduction), providing ancillary services and
selling grinding equipment manufactured by the Company, and (3) compounding
sales and services, which include the manufacture and sale of concentrates. The
Company's distribution operations utilize the Company's size reduction and
compounding facilities to process petrochemical products prior to sale. Oilfield
services revenues include revenues derived from (1) exploration sales and
services (new tubular goods inspection), (2) production sales and services
(reclamation, reconditioning and inspection of used tubular goods and sucker
rods), (3) corrosion control services (coating of tubular goods and sucker
rods), and (4) other sales and services (oilfield engine sales and services in
Canada). Service revenues in both of the Company's business segments are
recognized as the services are performed or, in the case of product sales,
revenues are generally recognized upon shipment to third parties.
Cost of sales and services for the petrochemical processing and
oilfield services segments is primarily comprised of compensation and benefits
to non-administrative employees, occupancy costs, repair and maintenance,
electricity and equipment costs and supplies, and, in the case of concentrate
manufacturing operations and the Company's distribution business, purchased raw
materials. Selling, general and administrative expenses consist primarily of
compensation and related benefits to the sales and marketing, executive
management, accounting, human resources and other administrative employees of
the Company, other sales and marketing expenses, communications costs, systems
costs, insurance costs and legal and accounting professional fees.
The gross margin percentages for the distribution and concentrate
manufacturing businesses, generally are significantly lower than those generated
by the Company's size reduction services. Several of the Company's petrochemical
processing subsidiaries, including the Company's concentrate manufacturing and
distribution operations, typically buy raw materials, improve the material and
then sell the finished product. In contrast, many of the Company's size
reduction operations, particularly the U.S. locations, typically involve
processing customer-owned material (referred to as "toll" processing). As a
result of these factors, the expansion of the Company's distribution and
concentrate manufacturing businesses within the petrochemical processing segment
has had the effect of reducing overall petrochemical processing margins as a
percentage of revenue.
The demand for the Company's oilfield products and services depends
upon oil and natural gas prices and the level of oil and natural gas production
and exploration activity. In addition to changes in commodity prices,
exploration and production activities are affected by worldwide economic
conditions, supply and demand for oil and natural gas, seasonal trends and the
political stability of oil-producing countries. The oil and gas industry has
been highly volatile over the past several years, due primarily to the
volatility of oil and natural gas prices. During fiscal 1996 and 1997, the oil
and gas service industry generally experienced increased demand and improved
product and service pricing as a result of improved commodity prices and greater
levels of oil and gas exploration and production activity, due largely to a
strong world economy. In fiscal 1998, however, oil prices declined significantly
versus fiscal 1997 levels. While gas prices also declined during this period,
they declined to a lesser
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22
extent. These trends were attributed to, among other factors, an excess
worldwide oil supply, lower domestic energy demand resulting from an
unseasonably warm winter and a decline in demand due to the economic downturn in
Southeast Asia. As oil and, to a lesser extent, natural gas prices declined
during this period, demand for oilfield products and services, including those
provided by the Company, softened.
Oil and gas prices continued to fall sharply in the first half of
fiscal 1999, reaching a low of just under eleven dollars per barrel during the
first quarter of fiscal 1999. This 25-year low, in real dollar terms, resulted
in extremely depressed levels of oilfield exploration and production activity.
The Company's oilfield service revenues and income have been adversely impacted
by these factors. More recently, the price of oil has risen to above $25 per
barrel and natural gas prices have also risen. This increase, however, has not
yet resulted in any material increase in the demand for the Company's products
and services, particularly exploration related products and services. Although,
barring another collapse of commodity prices, the Company anticipates that
oilfield service activity will increase and, hence, the demand for the Company's
oilfield services will improve, it appears that the level of activity will
continue to be relatively weak, at least during the first quarter of fiscal
2000. Although the Company is optimistic that, if oil and gas prices remain at
or near their present levels, market conditions will improve at some point, the
timing of such a recovery cannot be predicted with certainty.
LIQUIDITY AND CAPITAL RESOURCES
The following are considered by management as key measures of liquidity
applicable to the Company:
1999 1998
-------- --------
Cash and cash equivalent $37,439 $51,135
Working capital 70,202 89,220
Current ratio 2.3 2.6
Debt-to-capitalization .59 to 1 .53 to 1
Year Ended September 30, 1999 compared to Year Ended September 30, 1998
Cash and cash equivalents decreased $13,696 during fiscal year 1999 and
the Company's working capital decreased during fiscal year 1999 from $89,220 at
September 30, 1998 to $70,202 at September 30, 1999, as a result of the factors
described below.
During fiscal year 1999, cash provided by operating activities
increased to $10,024 compared to $181 for the year ended September 30, 1998. Net
cash provided by operating activities improved despite the fact that the Company
incurred a net loss in fiscal 1999, compared to net income in fiscal 1998. The
increase was due to the fact that during fiscal 1998, a gain on sale of the
WedTech equity investment was included in net income, but was classified as an
investing activity. Also, in fiscal 1999 the net loss included several non-cash
charges. Lastly, changes in the working capital accounts had a significant
influence on the change in net cash provided by operating activities.
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Capital expenditures totaled $15,333 during fiscal 1999, of which
$5,305 related to the oilfield services segment and $10,028 related to the
petrochemical processing segment. A majority of fiscal 1999 capital expenditures
were incurred to expand or enhance existing facilities, as opposed to
replacement or refurbishment of existing productive or soon to be retired
assets. Fiscal 2000 capital expenditure requirements are expected to be financed
using existing cash and/or funds available under foreign credit facilities.
Cash flows used for financing activities declined to $1,126 during
fiscal year 1999 compared to $4,992 during fiscal 1998. The decline was
primarily due to increased borrowings and lower common stock dividends,
partially offset by greater debt repayments and lower proceeds from the sale of
common stock.
During fiscal years 1995 through 1999, the Company acquired sixteen
businesses. During fiscal 1999, the Company used $7,684 of cash to acquire one
oilfield service business. These sixteen acquisitions were made primarily using
available cash, the issuance of the Company's Common Stock and the assumption of
outstanding debt of the acquired businesses. The Company anticipates it will
continue to seek acquisitions in the future, however, it is expected that the
number of acquisitions will decline in comparison to recent years. This trend
will have the effect of reducing both the Company's revenue growth and its
capital requirements.
As of November 30, 1999, the Company had approximately $9,970 of
additional borrowing capacity available under various foreign credit
arrangements. Currently, the Company does not have a domestic credit facility.
The Company anticipates that existing cash balances and the additional borrowing
capacity provided by the foreign credit facilities will be an adequate source of
liquidity for fiscal 2000.
The terms of the Company's Senior Notes limit the amount of liens and
additional indebtedness incurred by the Company. The Company's foreign
facilities are generally secured by assets owned by subsidiaries of the Company
and also carry various financial covenants.
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RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------
% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
-------- -------- -------- -------- -------- --------
NET REVENUES
Distribution of material ................................ $ 81,964 43 $ 76,360 43 $ 19,279 19
Size reduction services and other sales and services .... 48,093 26 52,515 30 46,011 46
Compounding sales and services .......................... 57,420 31 48,357 27 34,728 35
-------- -------- -------- -------- -------- --------
Total petrochemical processing revenue .................. 187,477 100 177,232 100 100,018 100
-------- -------- --------
Exploration sales and services .......................... 25,203 34 39,781 38 37,557 38
Production sales and services ........................... 28,766 38 35,810 35 33,136 34
Corrosion control services .............................. 17,219 23 24,985 24 23,210 24
Other sales and services ................................ 3,708 5 3,535 3 4,121 4
-------- -------- -------- -------- -------- --------
Total oilfield sales and services revenues .............. 74,896 100 104,111 100 98,024 100
-------- -------- --------
Total .............................................. $262,373 $281,343 $198,042
======== ======== ========
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------
% OF % OF % OF
1999 TOTAL 1998 TOTAL 1997 TOTAL
-------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS)
Oilfield sales and services .................... $ (376) 16 $ 13,025 55 $ 14,447 64
Petrochemical processing sales and services .... (1,967) 84 10,526 45 8,180 36
-------- -------- -------- -------- -------- --------
Total operations ............................... (2,343) 100 23,551 100 22,627 100
General corporate expenses ..................... (12,237) (14,475) (9,217)
-------- -------- --------
Total ..................................... $(14,580) $ 9,076 $ 13,410
======== ======== ========
- ---------------------------
Year Ended September 30, 1999 Compared to Year Ended September 30, 1998
Revenues. Consolidated revenues decreased $18,970 (7%) during fiscal
1999, as compared to fiscal 1998. The decline is attributable to an oilfield
service revenue decline partially offset by a petrochemical processing revenue
increase.
Petrochemical processing revenues increased from $177,232 during fiscal
1998 to $187,477 for fiscal 1999. This increase of 6% was due to the
acquisitions of J.R. Courtenay (N.Z.) in March 1998, and Soreco in June 1998 and
an increase of domestic compounding revenues, offset, in part, by lower domestic
grinding revenues and lower overall European revenues.
Distribution revenues were $81,964 for fiscal year 1999, an increase of
$5,604 (7%) for fiscal 1999. The increase primarily resulted from the effect of
the Courtenay acquisition during March 1998, partially offset by a
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decline in European distribution revenues. Size reduction services and other
sales and service revenues declined $4,422 (8%) during fiscal 1999 to $48,093,
compared to fiscal 1998. The decline resulted primarily from a decrease in
demand for the Company's products and services domestically and in Europe.
Compounding sales and service revenues increased $9,063 (19%) to $57,420 for
fiscal 1999. This increase is mostly due to greater domestic compounding
revenues, due in large part to a mid-fiscal 1998 domestic compounding capacity
expansion and the acquisition of Soreco made in June 1998.
Oilfield Service revenues declined from $104,111 for fiscal 1998 to
$74,896 for fiscal 1999. This result represents a decline of $29,215 (28%). The
revenue decline was broad-based, across all Oilfield Service product lines and
was the result of declining demand for the Company's oilfield products and
services. Management responded to the lower fiscal 1999 revenues with
significant cost reductions, particularly personnel reductions as described
below. Declining demand is the result of depressed average oil and, to a lesser
extent, gas prices during much of fiscal 1999, which has resulted in
significantly lower average rig counts in both the United States and Canada
during fiscal 1999, compared to fiscal 1998. The revenue decrease was partially
offset by the effect of the MilCorp acquisition in February 1999. During the
year ended September 30, 1999, the domestic drilling rig count averaged 602, a
33% decline from the average of approximately 905 during fiscal 1998. West Texas
intermediate crude prices improved from an average price of $16.20 during fiscal
1998 to $16.31 during fiscal 1999. During most of fiscal 1999, the price of oil
rose and is currently above $25 per barrel. This increase, however, has not yet
resulted in an increase in the level of drilling activity in North America to
average fiscal 1998 levels. In fact, the U.S. drilling rig count declined to
only 488 rigs on April 30, 1999 and has been rising slowly to 813 rigs as of
December 10, 1999. This trend is detrimental to the Company's oilfield service
business, not only from a revenue perspective, but also because this trend has
the effect of lowering overall margins, since the Company's exploration services
sales usually generate higher gross margins than other oilfield products and
services sales. Fortunately, production activity improved in the second half of
fiscal 1999, as evidenced by a 9% improvement of the Company's production
services revenues in the fourth quarter of fiscal 1999, over the third quarter
of fiscal 1999. Barring another collapse of oil and gas prices, the Company
anticipates that oilfield service activity will generally continue to increase
and, hence, the demand for the Company's oilfield services will increase. The
timing and duration of a demand recovery, if any, however, cannot be predicted
with certainty.
Costs and Expenses. Consolidated gross margins (calculated as net
revenues minus total costs of sales and services), as a percentage of revenues,
decreased from 24.7% during fiscal 1998 to 23.1% during fiscal 1999. Gross
margins declined during the year due to a decrease in Oilfield Service gross
margins, partially offset by an increase in Petrochemical gross margins.
Petrochemical gross margins were 22.1% during fiscal 1999 compared to
21.5% during fiscal 1998. The improvement was primarily the result of an
increase in domestic and European gross margins, as a percentage of revenues.
Domestic gross margin gains resulted from cost cutting efforts, production
efficiency improvements and an increase in domestic compounding volumes (due in
large part to the mid-year 1998 capacity expansion). European improvements
resulted from a favorable revenue mixture, along with the beneficial effect of
rising resin prices during the last half of fiscal 1999.
Oilfield Service gross margins declined to 23.3% for fiscal 1999 from
30.1% in fiscal 1998. The decline was driven by lower volumes (as costs were
spread over less revenues), weaker pricing, due to very poor market conditions
and a less favorable revenue mix. Additionally, during the second quarter, the
Company wrote down $1,203 of oilfield service inventory to estimated market
selling prices, thereby increasing cost of sales expenses. The Company reacted
to poor market conditions by rationalizing the cost structure of the Oilfield
Service
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business to reflect current activity levels. These cost reductions included a
significant headcount reduction of the Oilfield Service workforce during the
past year and a reduction of contract labor expenses. Additionally, during
fiscal 1999, most oilfield service salaried and hourly employees accepted a 10%
pay reduction. The Company's Chairman/CFO and CEO/President also voluntarily
accepted a 10% pay cut. In August 1999, 50% of the pay reduction was
reestablished and, in December 1999, the remaining portion was reinstated.
Selling, general and administrative costs decreased $2,864 (6%) during
fiscal 1999, compared to fiscal 1998. The decrease resulted from significant
cost reductions within the Oilfield Service and Domestic Petrochemical
businesses and lower corporate management compensation expenses. These declines
were partially offset by an increase of selling, general and administrative
expenses due to the acquisitions of J.R. Courtenay, Soreco and MilCorp and an
increase in workers' compensation expenses. The decline in Oilfield Service and
domestic Petrochemical Processing selling, general and administrative expenses
were driven largely by staffing reductions. As a percentage of revenues selling,
general and administrative expenses increased to 16.1% in fiscal 1999 from 16.0%
in 1998. The increase is mostly due to the drastic decline in oilfield service
revenues, offset partially by the expense reductions discussed above.
Depreciation and amortization expenses increased from $15,389 in fiscal
1998 to $17,074 in fiscal 1999. This increase was mostly the result of capital
expenditures and business acquisitions during 1998 and 1999.
Impairment of long-lived assets. During fiscal 1999, the Company
recognized a $9,291 non-cash charge for the impairment of long-lived assets.
$748 of this charge relates to the oilfield services business, of which $310 of
the write-down related to the impairment of goodwill and the remaining to
machinery and equipment. $8,543 of the total charge relates to the petrochemical
business and reflects the impairment of four underperforming facilities. $4,812
of the petrochemical charge includes the impairment of goodwill and $3,489
consists of machinery and equipment impairment. The amount of the machinery and
equipment impairments were determined by comparing fair values with the
corresponding carrying values of the assets evaluated. Fair value was determined
as the estimated current market value of the assets evaluated.
Write-off of property, plant and equipment. During fiscal 1999, the
Company reduced the carrying value of property, plant and equipment primarily
due to assets which are obsolete or are not in working order and will not be
used in the future. Of the $3,420 write-down, $2,779 related to the
petrochemical business and $641 related to the oilfield service segment.
Severance expenses. During fiscal 1999, the Company recognized
severance expenses of $2,499 relating to terminated employees. Of this charge
$1,500 related to management changes within the Company's European Petrochemical
Processing operations.
Write-off of start-up costs. The write-off of start-up costs of $867
primarily relates to the closure, during the second quarter of fiscal 1999, of
an operation which had capitalized start-up costs. This operation had an
immaterial impact on the Company's financial results prior to the write-off of
capitalized start-up costs.
Operating Income. Operating income decreased from $9,076 during fiscal
1998 to a loss of $(14,580) during fiscal 1999. The decrease was due to the
changes in revenues and costs and expenses discussed above.
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27
Gain on sale of Equity Investment. During the first quarter of fiscal
1998, the Company recognized a pre-tax gain of $11,773 on the sale of an equity
investment. The Company received cash of $14,484 and recorded an after-tax gain
of approximately $6,799 on the sale.
Interest Income/Expense. Net interest expense was $11,910 during fiscal
1999 compared to $10,048 during fiscal 1998. This change was primarily the
result of lower cash balances due to acquisitions and internal capital
expenditures.
Income Taxes. The Company's effective income tax rate decreased to 24%
during fiscal 1999 compared to 44% during fiscal 1998. The effective income tax
rate decrease was caused by a change of the mixture of pre-tax income generated
in different tax jurisdictions, a significant increase of permanent differences
between taxable and book income (primarily due to fiscal 1999 write-down of
impaired goodwill) and the fact that the Company's fiscal 1998 sale of an equity
investment generated tax expense equal to 42% of the pre-tax gain.
The Company has, for tax purposes, $23,904 in net operating loss
carryforwards which expire between 2001 and 2019, and $489 in investment,
alternative minimum and other tax credit carryforwards which, if utilized, will
result in a cash savings. Net operating loss carryforwards in the amount of
$2,311 and all of the tax credits are expected to expire unused.
Extraordinary Gain. During fiscal 1999 the Company repurchased Senior
Notes with a face value of $2,000, at a discount, recognizing a pre-tax gain of
$614 and an after-tax gain of $399.
Net Income. For fiscal 1999, the Company had a net loss after the
extraordinary item of $(19,703) compared to net income of $6,006 in fiscal 1998,
due to the factors described above.
Foreign Currency Translation. The fluctuations of the U.S. Dollar
against the Dutch Guilder, Swedish Krona, British Pound, Italian Lira, Canadian
Dollar, the French Franc, the Australian Dollar and the New Zealand Dollar did
not materially impact the translation of revenues and income of the Company's
international operations.
Year Ended September 30, 1998 Compared to Year Ended September 30, 1997
Revenues. Consolidated revenues increased $83,301 (42%) during fiscal
1998 compared to fiscal 1997. The revenue growth resulted primarily from the
business acquisitions made by the Company during fiscal 1997 and 1998 and, to a
lesser extent, internal growth within both of the Company's business segments.
Oilfield service revenues increased $6,087 or 6% to $104,111 during
fiscal 1998. The revenue growth was driven primarily by the fiscal 1998 oilfield
service acquisitions and the increased demand for the Company's services during
the first half of fiscal 1998. During the third quarter, the revenue growth rate
declined, and revenues contracted during the fourth quarter of fiscal 1998,
compared to fiscal 1997. Exploration services revenues increased $2,224 or 6%
during fiscal 1998 compared to fiscal 1997, primarily a result of the effects of
an acquisition. The Company's Exploration services are driven, in large part, by
the domestic rig count which declined significantly over the course of fiscal
1998; however, the average fiscal 1998 domestic rig count was down only slightly
versus the fiscal 1997 average. Exploration service revenues were consistent
with the change of the average rig count, down less than 0.5%, absent the effect
of an acquisition. Production service revenues increased
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28
$2,674 (8%) during fiscal 1998 compared to 1997, mostly due to an acquisition,
rather than internal growth. Production service revenues are driven by the level
of production activity, which in turn, is dependent upon oil and gas prices and
the level of rig workover activity. During fiscal 1998, average oil and gas
prices and the workover rig count were down compared to fiscal 1997. Despite
this fact, production service revenues increased modestly during fiscal 1998,
excluding the effect of the Curley's acquisition. Corrosion control revenues
improved $1,775 (8%) during 1998 compared to fiscal 1997. This revenue growth
resulted from relatively strong Gulf of Mexico activity compared to other oil
and gas production and exploration geographical areas. Other oilfield sales and
services consist of the Company's Canadian oilfield engine sales and
reconditioning business. These revenues declined primarily as a result of
declining oil prices during fiscal 1998 compared to fiscal 1997.
Petrochemical processing revenues increased $77,214 or 77% during
fiscal 1998 compared to fiscal 1997. Of this growth, 85% resulted from the
fiscal 1998 and 1997 acquisitions, all of which were accounted for using the
purchase method of accounting. Under the purchase method of accounting, the
results of each acquired entity are included in the Company's consolidated
results only from the date of the acquisition forward. Size reduction services
and other sales and services revenues improved to $52,515 during fiscal 1998
compared to $46,011 during fiscal 1997, representing an increase of $6,504
(14%). In addition to the effect of the business acquisitions, these revenues
increased due to internal growth in the Company's domestic and European
operations. Compounding sales and services revenues increased $13,629 or 39%
almost entirely due to the fiscal 1997 and 1998 acquisitions, particularly the
acquisition of Bayshore. Distribution revenues rose $57,081 or 296%, primarily
due to the acquisitions and the growth of the Company's European distribution
operations. Worldwide revenues of one petrochemical processing customer
comprised approximately 10% of the Company's consolidated revenues.
Costs and Expenses. Gross margins (calculated as total revenues minus
total costs of sales and services), as a percentage of revenues in fiscal 1998
declined to 24.7% compared to 28.7% in fiscal 1997. The declines resulted
primarily from the revenue growth in the petrochemical business segment and,
particularly in the distribution business, which, in the aggregate, generates
lower gross margins as a percentage of revenues. Within the Company's oilfield
service business, gross margins as a percentage of revenues declined
approximately 1% to 30.1%. The decline resulted primarily from a change in the
relative mixture of various product sales and service revenues rather than a
significant change in average prices. Petrochemical processing gross margins
declined from 26.5%, of revenues in fiscal 1997 to 21.5% in fiscal 1998. The
decline is primarily due to the significant increases in lower margin
compounding and distribution revenues as a percentage of total petrochemical
processing revenues in fiscal 1998 compared to fiscal 1997. Generally, gross
margins as a percentage of revenues of the Company's size reduction operations,
performed on a toll basis, are higher than the gross margins of the oilfield
service operations. Conversely, the gross margins of the Company's concentrate
and ground petrochemical powder manufacturing and distribution businesses are
generally lower than oilfield service gross margins, as a percentage of
revenues, due to the higher raw material cost component included in these
revenues.
Selling, general and administrative expenses increased $13,041 (41%)
from $31,981 during fiscal 1997 to $45,022 during fiscal 1998. The increase
resulted from the timing of the fiscal 1998 and 1997 acquisitions, and an
increase in corporate administration and oilfield service expenses. Corporate
expenses rose primarily due to an increase in legal and bonus expenses. A
majority of fiscal 1998 legal expenses related to legal matters discussed in
Item 3 - "Legal Proceedings" included in this Form 10-K. Two of the legal
matters, which comprised a significant portion of fiscal 1998 legal expenses,
have been concluded favorably. The bonus expense increase was due to bonuses of
$1,300 paid by the Company to over 300 employees during the first quarter of
fiscal 1998 and was classified as a general corporate expense. During the fourth
quarter of fiscal 1998, the Company began to reduce oilfield service selling,
general and administrative expenses based upon the reduced levels of activity in
this business
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and has continued to reduce such expenses. As a percentage of revenues, selling,
general and administrative expenses decreased slightly from 16.1% in fiscal 1997
to 16.0% in fiscal 1998. The change was primarily the result of the increases in
expenses, described above, offset by the effect of increased distribution and
compounding revenues. Generally, the Company's distribution and compounding
operations incur lower selling, general and administrative expenses, as a
percentage of revenues, than the Company's other sales and services.
Depreciation and amortization expense increased from $11,349 in fiscal
1997 to $15,389 in fiscal 1998. The increase resulted from additions of
property, plant and equipment and goodwill primarily due to the acquisitions
made during fiscal 1998 and the timing of 1997 acquisitions, as well as
increased amortization of debt issuance costs related to the June 1997 Senior
Notes placement.
Operating Income. Operating income declined from $13,410 for fiscal
1997 to $9,076 for fiscal 1998. The decrease was due to the changes in revenues
and costs and expenses discussed above.
Gain on Sale of Equity Investment. During the first quarter of fiscal
1998, the Company recognized a pre-tax gain of $11,773 on the sale of the
Company's 50% equity ownership in WedTech Inc. The Company received cash of
$14,484 and recorded an after-tax gain of $6,799 on the sale.
Interest Income/Expense. Net interest expense was $10,048 during fiscal
1998. For fiscal 1997, the Company incurred net interest expense of $3,764. This
change was primarily the result of the June 1997 issuance of $120,000 103/8%
Senior Notes and, to a lesser extent, debt assumed in connection with the fiscal
1998 and 1997 acquisitions.
Income Taxes. The Company's effective income tax rate increased to 44%
during fiscal 1998, compared to 41% during fiscal 1997. The increase was
primarily the result of the sale of the Company's equity investment in WedTech
which created tax expense equal to 42% of the pre-tax gain, an increase in
permanent book to tax differences relative to pre-tax income, offset by the
effect of a decline in the Company's Italian operations' income tax rates. As
non-deductible goodwill amortization continues to increase, due to future
acquisitions, the Company would anticipate that future effective tax rates,
likewise, would increase. Additionally, the Company's overall tax rate varies
depending upon the mixture of pre-tax income generated by the Company's
operations in various taxing jurisdictions.
Net Income. For fiscal 1998, the Company had net income of $6,006, as
compared to net income of $6,098 for fiscal 1997, due to the factors described
above.
Foreign Currency Translation. The fluctuations of the U.S. dollar
against the Dutch guilder, Swedish krona, British pound, Italian lira, Canadian
dollar, and the French franc did not materially impact the translation of
revenues and income of the Company's foreign operations materially.
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YEAR 2000 ISSUE
The Year 2000 problem arose because some computer programs use only the
last two digits of a year as a reference date, causing the program to improperly
recognize a year that does not begin with "19."
The Company began working toward Year 2000 readiness in fiscal 1997 and
has now completed its Year 2000 readiness project.
To improve access to business information through common, integrated
computing systems within business operations, the Company instituted a business
systems replacement project for its domestic, Australian and New Zealand
petrochemical operations. The new systems ("Business Replacement Systems"),
which the Company believes have made these operations' business computer systems
Year 2000 ready, have now been completed and implemented. Remaining business
software programs, which are used by the Company's Oilfield and European
Petrochemical operations, were modified, in the case of Oilfield operations, and
upgraded, in the case of European Petrochemical operations, to make them Year
2000 ready.
The implementation of the Year 2000 readiness project has not resulted
in any other IT projects being deferred, except for a delay in
non-Year-2000-related upgrades of the Oilfield operation's business software
program. The Company has already begun making these upgrades.
Overview. The Company's Year 2000 readiness project was divided into
four sections: Corporate and Facility Infrastructure, Applications Software,
Inspection and Processing Equipment, and Third-Party Suppliers. Each section
consisted of four phases: Year 2000 readiness analysis and assessment; retiring,
replacing, or upgrading items that were not Year 2000 ready; remediation testing
of upgraded and replacement hardware and software; and contingency planning.
Application Software. Application Software consisted of all software
not used directly in conjunction with the operation of the Company's service and
manufacturing facilities. The Application Software section included the
conversion of software which was not Year 2000 ready or, where available from
the supplier, the replacement of such software. The Company has completed the
Application Software's analysis and assessment, conversion and replacement, and
testing phases. The Company believes its Application Software is currently Year
2000 ready.
Corporate Infrastructure. The Corporate Infrastructure section
consisted of mainframe computing hardware and connectivity. The Company has
completed the Corporate Infrastructure's analysis and assessment, upgrade and
replacement, and testing phases. The Company believes its Corporate
Infrastructure is currently Year 2000 ready.
Facility Infrastructure. The Facility Infrastructure section consisted
of hardware and systems software, including embedded computer chips, used in the
operation of the Company's facilities. The Facility Infrastructure's analysis
and assessment; replacement, upgrade and conversion; and testing phases have
been completed. The Company believes its Facility Infrastructure is currently
Year 2000 ready.
Inspection and Processing Equipment. The Company's oilfield services
sector uses and manufactures inspection and processing equipment, which the
Company believes to currently be Year 2000 ready. The Company's petrochemical
sector uses and manufactures processing equipment, which the Company believes to
currently be Year 2000 ready.
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Third Party Suppliers. The Company has identified, communicated with
and evaluated the state of Year 2000 preparedness of critical Third Party
Suppliers for all its operations. As noted in more detail below, the Company has
developed a contingency plan in which it has identified alternative suppliers
that can be used if necessary.
Contingency Planning. The Company has developed a contingency plan to
minimize Year 2000 risk. The plan covers areas in which the Year 2000 readiness
project may not adequately address all of the relevant risk issues. For example,
the Company cannot guarantee the Year 2000 readiness of critical third-party
suppliers, and thus has taken steps to reduce the risk of an external
partner-related failure. These steps include identifying alternative suppliers
of raw materials and equipment, and alternative shippers of raw materials and
finished products. The Company also will staff a communications center that will
monitor Year 2000 developments, notify business operations of Year 2000-related
problems, and assist operations in remedying these problems.
Costs. The total cost associated with required software and hardware
modifications to become Year 2000 ready has not been material to the Company's
financial position or results of operations. The estimated total cost of the
Year 2000 readiness project was approximately $490. The total amount expended on
the project through September 30, 1999 was about $324. The cost to implement the
Business Replacement Systems is not included in these estimates. Costs related
to the Year 2000 project have been accounted for in accordance with the
Company's existing policies. Other than purchases of new hardware and software,
Year 2000 project expenditures have been expensed as incurred.
Risks. A Year 2000 failure could result in a business disruption that
adversely affects the Company's business, financial condition or results of
operations. For example, if a Year 2000 failure causes insufficient rail and
freight service to be available to the Company, the receipt of raw materials and
the shipment of finished products by the Company's petrochemical operations
could be curtailed. Such failures could materially and adversely affect the
Company's results of operations, liquidity and financial condition. Due to the
general uncertainty inherent in the Year 2000 problem, resulting in part from
the uncertainty of the Year 2000 readiness of third-party suppliers and
customers, the Company cannot determine at this time whether the consequences of
Year 2000 failures will have a material impact on the Company's results of
operations, liquidity, or financial condition. The Company believes that, with
the implementation of new business systems and the completion of the Year 2000
Project, the possibility of significant interruptions of normal operations
should be reduced.
CONVERSION TO THE EURO CURRENCY
The Company has a substantial portion of its operations within
countries that adopted the Euro currency on January 1, 1999. The Company has
begun invoicing and receiving payments denominated in Euros whenever possible.
The cost of achieving this has not been material. The adoption of the Euro by
the European Economic and Monetary Union is ultimately expected, from a
competitive viewpoint, to benefit the Company to some extent as price
transparency becomes a reality. The benefit will, however, be somewhat limited
as transportation costs are an important consideration for the Company's
customers. At this time, the Company anticipates that the impact of the adopting
of the Euro with regard to currency exchange and taxation implications will not
have a material impact on the results of operations or the financial condition
of the Company.
29
32
FORWARD-LOOKING STATEMENTS
The statements contained in all parts of this document, including, but
not limited to, timing of new services or facilities, ability to compete, effect
of enhanced distribution capability, future capital expenditures, effects of
compliance with laws, effects of the Euro adoption, matters relating to
operating facilities, effect and cost of litigation and remediation, future
liquidity, future capital expenditures, future acquisitions, future market
conditions, reductions in expenses, derivative transactions, effects of the Year
2000 issue, marketing plans, demand for the Company's products and services,
future growth plans, financial results and any other statements which are not
historical facts are forward-looking statements within the meaning of section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that involve substantial risks and uncertainties. When words such as
"anticipate", "believe", "estimate", "intend", "expect", "plan" and similar
expressions are used, they are intended to identify the statements as
forward-looking. Actual results, performance or achievements can differ
materially from results suggested by these forward-looking statements due to a
number of factors, including those described below and elsewhere in this
document and those described in the Company's other filings with the SEC.
The significant indebtedness incurred in June 1997 as a result of the
placement of the Senior Notes due 2007 has several important implications for
the Company, including, but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations must be dedicated to service
the Company's indebtedness and will not be available for other purposes, (ii)
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures or acquisitions or for other purposes may be
restricted, (iii) the Company's flexibility to expand, make capital expenditures
or acquisitions or for other purposes may be impaired (future acquisitions may
require the Company to alter its capitalization significantly, which changes may
significantly alter the leverage of the Company), (iv) the indenture relating to
the Senior Notes contains, and future agreements relating to the Company's
indebtedness may contain, numerous financial and other restrictive covenants,
including, among other things, limitations on the ability of the Company to
incur additional indebtedness, to create liens and other encumbrances, to make
certain payments and investments, to sell or otherwise dispose of assets or to
merge or consolidate with another entity (failure to comply with these
provisions may result in an event of default, which, if not cured or waived,
could have a material adverse effect on the Company), and (v) the ability of the
Company to satisfy its obligations pursuant to such indebtedness will be
dependent upon the Company's future performance which, in turn, will be subject
to general economic conditions and management, financial, business, regulatory
and other factors affecting the business and operations of the Company, some of
which are not in the Company's control. To the extent that the Company is unable
to repay the principal amount of the Notes out of cash on hand, it may (i) seek
to repay the Notes with the proceeds of an equity offering, (ii) seek
refinancing, or (iii) sell significant assets. There can be no assurance that
any of the forgoing alternatives will be available to the Company at all or on
terms that are favorable to the Company. If the Company cannot satisfy its
obligations related to such indebtedness, substantially all of the Company's
long-term debt could be in default and could be declared immediately due and
payable which would have a material adverse effect on the Company.
The oil and gas industry in which the Company participates through its
oilfield services business has experienced significant volatility. Demand for
the Company's oilfield services depends principally upon the level of domestic
oil and gas drilling and workover activity, which, in turn, depends upon factors
such as the level of oil and gas prices, expectations about future oil and gas
prices, the cost of exploring for and producing oil and gas, worldwide weather
conditions, international political, military, regulatory and economic
conditions and the ability of oil and gas companies to raise capital. Oil prices
and, to a lesser extent, gas prices declined significantly during 1998, which
resulted in decreases in oil and gas exploration and production activities.
While oil and gas prices have
30
33
rebounded during 1999, oil and gas exploration and production activity remains
depressed compared to fiscal 1997 levels. No assurance can be given that current
weak levels of domestic oil and gas exploration activities will improve or that
the demand for the Company's oilfield services will increase. Industry
conditions will continue to be influenced by numerous factors over which the
Company will have no control. A decline in oil or gas prices or domestic
oilfield activity could have a material adverse effect on the Company's oilfield
service business, results of operations and prospects. Furthermore, the oilfield
services business is substantially seasonal, reflecting the pattern of oilfield
drilling and workovers, with the first and fourth quarters of the fiscal years
having generally higher levels of activity. Drilling and workover activity can
fluctuate significantly in a short period of time, particularly in the United
States and Canada.
The business cycles of the Company's petrochemical processing services
segment are affected by changes in the cost of the petrochemicals produced by
the major chemical companies. These costs are outside of the Company's control
and the business cycles are generally volatile and relatively unpredictable. In
addition, such business cycles may reflect cycles in the petroleum industry and
oil and gas price changes, which also affect both of the Company's business
segments and may make the Company, as a whole, vulnerable to the effect of
changes in the petroleum industry.
The operations of the Company's oilfield services and specialty
petrochemical processing businesses are dependent to a certain degree upon
proprietary technology, know-how and trade secrets either developed by the
Company or licensed to it by third parties. In many cases, these or equivalent
processes or technologies are available to the Company's competitors, customers
and others. In addition, there can be no assurance that such persons will not
develop substantially equivalent or superior proprietary processes and
technologies. The availability to, or development by others of equivalent or
superior information, processes or technologies could have a material adverse
effect on the Company.
Since the beginning of fiscal 1994, the Company has made many
acquisitions, and management expects to acquire other businesses in the future.
There can be no assurance that the Company will be able to identify or reach
mutually agreeable terms with acquisition candidates and their owners, or that
the Company will be able to profitably manage additional businesses or
successfully integrate such additional businesses into the Company at all, or
without substantial costs, delays or other problems. There can be no assurance
that businesses acquired will achieve sales and profitability that justify the
investment made by the Company. Any inability on the part of the Company to
control these risks effectively and integrate and manage acquired businesses
could have a material adverse effect on the Company. The Company may, to the
extent allowed by agreements, incur indebtedness to finance future acquisitions.
There can be no assurance that the Company will be able to obtain any such
financing or that, if available, such financing will be on terms acceptable to
the Company. Acquisitions may result in increased depreciation and amortization
expense, increased interest expense, increased financial leverage or decreased
operating income, any of which could have a material adverse effect on the
Company's operating results.
The Company entered the specialty petrochemical processing industry
with its acquisition of Wedco in April 1996, and had no experience in the
industry prior to the acquisition. Since the acquisition of Wedco, the Company
has expanded its specialty petrochemical processing operations by making
numerous business acquisitions. The success of the Company will depend, in part,
on the Company's ability to continue the integration of acquired specialty
chemical operations by, among other things, centralizing certain functions to
achieve cost savings and developing programs and processes that will promote
cooperation among the businesses and the sharing of resources. In addition, the
recent growth of the Company will place significant demands on
31
34
the Company's management, internal systems and networks. There can be no
assurance that the Company will be able to effectively manage or implement its
plans for these operations or that, if implemented, such plans will be
successful. In addition, in fiscal year 1997, the Company began to expand the
distribution aspects of its specialty petrochemical production services business
through the acquisition of the Micropowders Business, the execution of supply
agreements with certain resin suppliers and the acquisitions of Rotec, Verplast,
and JRC. Each of these operations, as well as the Bayshore operation, requires
the Company to buy and manage inventories of supplies and products in the
specialty petrochemical processing business. The Company's entry into the
distribution portion of this business requires the Company to maintain greater
levels of working capital than it has historically and to manage the risk of
ownership of commodity inventories having fluctuating market values. The
maintenance of excessive inventories in these businesses could expose the
Company to losses from drops in market prices for its products while maintenance
of insufficient inventories may result in lost sales to the Company.
A portion of the Company's current operations are conducted in
international markets, particularly the Company's Western European and Southeast
Asian specialty petrochemical processing services business. The Company expects
to continue to seek to expand its international operations primarily through
internal growth and, to a lesser extent, acquisitions. The Company's
international operations are subject to certain political, economic and other
uncertainties normally associated with international operations, including,
among others, risks of government policies regarding private property, taxation
policies, foreign exchange restrictions and currency fluctuations and other
restrictions arising out of foreign governmental sovereignty over areas in which
the Company conducts business that may limit or disrupt markets, restrict the
movement of funds or result in the deprivation of contract rights, and,
possibly, civil disturbance or other forms of conflict. Losses from the factors
above could be material in those countries where the Company now has or may in
the future have a concentration of assets.
The operations of the Company involve many risks, which, even through a
combination of experience, knowledge and careful evaluation, may not be
overcome. These risks include equipment or product failures or work related
accidents which could also result in personal injury, property damages,
pollution and other environmental risks. The Company may not be fully insured
against possible losses pursuant to such risks. Such losses could have a
material adverse impact on the Company. In addition, from time to time, the
Company is involved in various litigation matters arising in the ordinary course
of its business and is currently involved in numerous legal proceedings in
connection with its operations and those of its acquired companies. There can be
no assurance that the Company will not incur substantial liability as a result
of these or other proceedings. The Company is subject to numerous and changing
local, state, federal and foreign laws and regulations concerning the use,
storage, treatment, disposal and general handling of hazardous materials, some
of which may be considered to be hazardous wastes, and restricting releases of
pollutants and contaminants into the environment. These laws and regulations may
require the Company to obtain and maintain certain permits and other
authorizations mandating procedures under which the Company will operate and
restricting emissions. Many of these laws and regulations provide for strict
joint and several liability for the costs of cleaning up contamination resulting
from releases of regulated materials into the environment. Violations of
mandatory procedures under operating permits may result in fines, remedial
actions or, in more serious instances, shutdowns or revocation of permits or
authorizations. There can be no assurance that a review of the Company's past,
present or future operations by courts or federal, state, local or foreign
regulatory authorities will not result in determinations that could have a
material adverse effect on the Company's financial condition or results of
operations. In addition, the revocation of any of the Company's material
operating permits, the denial of any material permit application or the failure
to renew any material interim permit could have a material adverse effect on the
Company. The Company cannot
32
35
predict what environmental laws and regulations will be enacted or adopted in
the future or how such future law or regulation will be administered or
interpreted. To date, the Company has incurred compliance and clean-up costs in
connection with environmental laws and regulations and there can be no assurance
as to future costs. In particular, compliance with more stringent environmental
laws and regulations, more vigorous enforcement policies, or stricter
interpretations of current laws and regulations, or the occurrence of an
industrial accident, could have a material adverse effect on the Company.
Each of the industries in which the Company participates is highly
competitive. Some competitors or potential competitors of the Company have
substantially greater financial or other resources than the Company. The
inability of the Company to effectively compete in its markets would have a
material adverse effect on the Company.
33
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures include short-term debt
obligations carrying variable interest rates, and forward currency contracts
intended to hedge accounts payable obligations denominated in currencies other
than a given operation's functional currency.
The Company's strategy has typically been to finance only working
capital with variable interest rate debt and to fix interest rates for the
financing of long-term assets. Forward currency contracts are used by the
Company as a method to establish a fixed functional currency cost for raw
material purchases denominated in non-functional currency.
The following table summarizes the Company's market sensitive financial
instruments. These transactions are considered non-trading activities.
ON-BALANCE SHEET FINANCIAL INSTRUMENTS SEPTEMBER 30, 1999
- -------------------------------------- ----------------------------------------------------------------------
WEIGHTED AVERAGE
Variable interest rate debt: US$ EQUIVALENT YEAR-END INTEREST RATE EXPECTED MATURITY
-------------- ---------------------- -----------------
CURRENCY DENOMINATION
- ---------------------
Dutch Guilders $1,444 4.00% less than one year
British Pounds Sterling 650 6.50% less than one year
French Francs 69 3.74% various through 2001
Italian Lira 4,730 3.55% less than one year
Canadian Dollar 3,454 7.48% various through 2004
ANTICIPATED TRANSACTIONS AND RELATED DERIVATIVES
Forward Exchange Agreements (000s):
RECEIVE US$/PAY NEW ZEALAND $:
Contract Amounts US$ 879
Average Contractual Exchange Rate (NZ$/US$).5465
Expected Maturity Dates October 1999 through January 2000
RECEIVE US$/PAY AUSTRALIAN $:
Contract Amounts US$ 1,282
Average Contractual Exchange Rate (A$/US$).6555
Expected Maturity Dates October 1999 through January 2000
RECEIVE DEM/PAY GBP:
Contract Amounts DEM 95
Average Contractual Exchange Rate (GBP/DEM).33066
Expected Maturity Dates October 1999 through December 1999
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this
report. See index to this information on Page F-1 of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to
information under the caption "Proposal 1 - Election of Directors" and to the
information under the caption "Section 16(a) Reporting Delinquencies" in the
Company's definitive Proxy Statement (the "2000 Proxy Statement") for its annual
meeting of shareholders. The 2000 Proxy Statement or the information to be so
incorporated will be filed with the Securities and Exchange Commission (the
"Commission") not later than 120 days subsequent to September 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the 2000 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference to the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
The information required by this item is incorporated herein by
reference to the 2000 Proxy Statement.
35
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The response to this portion of Item 14 is submitted as a separate
section of this report on page F-1.
(b) There were no reports on Form 8-K during the Company's fiscal fourth
quarter.
(c) Exhibits required by Item 601 of S-K:
The following instruments and documents are included as Exhibits to
this Form 10-K. Exhibits incorporated by reference are so indicated by
parenthetical information.
EXHIBIT NO. EXHIBIT
- ----------- -------
2.1 -- Share Purchase Agreement between Rotec Chemicals Ltd. and the Registrant (filed as Exhibit 99.2 to
Form 8-K dated May 12, 1997)
2.2 -- Plan of Merger of ICO Merger Sub, Inc. with and into ICO, Inc. (filed as Exhibit 2.4 to Form 10-Q dated
August 13, 1998)
3.1 -- Articles of Incorporation of the Company dated March 20, 1998. (filed as Exhibit 3.1 to Form 10-Q dated
August 13, 1998)
3.2 -- Statement of Resolution of $6.75 Convertible Exchangeable Preferred Stock dated March 30, 1998 (filed
as Exhibit 3.2 to Form 10-K dated December 23, 1998)
3.3 -- Certificate of Designation of Junior Participating Preferred Stock of ICO Holdings, Inc. dated March 30,
1998 (filed as Exhibit 3.3 to Form 10-K dated December 23, 1998)
3.4 -- Amended and Restated By-Laws of the Company dated May 12, 1999 (filed as Exhibit 3.4 to Form 10-Q
dated May 14, 1999).
4.1 -- Indenture dated as of June 9, 1997 between the Company, as issuer, and Fleet National Bank, as trustee,
relating to Senior Notes due 2007 (filed as Exhibit 4.1 to Form S-4 dated June 17, 1997)
4.2 -- First Supplemental Indenture and Amendment dated April 1,1998 between the Company, as issuer, and
State Street and Trust Company (formerly Fleet National Bank), as trustee, relating to Senior Notes due
2007 (filed as Exhibit 4.2 to Form 10-Q dated May 15, 1998)
4.3 -- Second Supplemental Indenture and Amendment dated April 1, 1998 between ICO P&O, Inc., a wholly
owned subsidiary of the Registrant, and State Street and Trust Company (formerly Fleet National Bank),
as trustee, relating to Senior Notes due 2007 (filed as Exhibit 4.3 to Form 10-Q dated May 15, 1998)
4.4 -- Warrant Agreement -- Series A, dated as of September 1, 1992, between the Registrant and Society National
Bank (filed as Exhibit 4 of the Registrant's Annual Report on Form 10-K for 1992)
4.5 -- Stock Registration Rights Agreement dated April 30, 1996 by and between the Company, a subsidiary of
the Company and the Wedco Shareholders Group, as defined (filed as Exhibit 4.4 to Form S-4 dated May
15, 1996)
4.6 -- Shareholders' Rights Agreement dated November 20, 1997 by and between the Company and Harris
Trust and Savings Bank, as rights agent (filed as Exhibit 1 to Form 8-A dated December 22, 1997)
36
39
EXHIBIT NO. EXHIBIT
- ----------- -------
4.7 -- Shareholder Rights Agreement dated April 1, 1998 by and between the Registrant and Harris Trust and Savings
Bank, as rights agent (filed as Exhibit 4.7 to Form 10-Q for the quarter ended March 31, 1998)
10.1 -- ICO, Inc. 1985 Stock Option Plan, as amended (filed as Exhibit B to the Registrant's Definitive Proxy
Statement dated April 27, 1987 for the Annual Meeting of Shareholders)
10.2 -- Second Amended and Restated 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (filed
as Exhibit A to the Registrant's Definitive Proxy Statement dated January 26, 1999 for the Annual Meeting
of Shareholders)
10.3 -- 1994 Stock Option Plan of ICO, Inc. (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
June 24, 1994 for the Annual Meeting of Shareholders)
10.4 -- ICO, Inc. 1995 Stock Option Plan (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
August 10, 1995 for the Annual Meeting of Shareholders)
10.5 -- ICO, Inc. 1996 Stock Option Plan (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
August 29, 1996 for the Annual Meeting of Shareholders)
10.6 -- ICO, Inc. 1998 Stock Option Plan (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
January 23, 1998 for the Annual Meeting of Shareholders)
10.7 -- Willoughby International Stockholders Agreement dated April 30, 1996 (filed as Exhibit 10.9 to Form S-4
dated May 15, 1996)
10.8 -- Consulting Agreement-- William E. Willoughby (filed as Exhibit 10.13 to Form S-4 dated May 15, 1996)
10.9 -- Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.14 to Form S-4 dated May
15, 1996)
10.10 -- Addendum to Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.15 to form S-
4 dated May 15, 1996)
10.11 -- Non-Competition Covenant William E. Willoughby (filed as Exhibit 10.11 to Form S-4 dated May 15, 1996)
10.12 -- Stockholders Agreement respecting voting of shares of certain former Wedco common
shareholders (filed as Exhibit 10.21 to Form S-4 dated May 15, 1996)
10.13 -- Stockholders Agreement respecting voting of shares of certain ICO common shareholders
(filed as Exhibit 10.22 to Form S-4 dated May 15, 1996)
10.14 -- Employment Agreement dated April 1, 1995 by and between the Registrant and Asher O. Pacholder and
amendments thereto (filed as Exhibit 10.16 to Form 10-K dated December 29, 1997)
10.15 -- Employment Agreement dated April 1, 1995 by and between the Registrant and Sylvia A. Pacholder and
amendments thereto (filed as Exhibit 10.17 to Form 10-K dated December 29, 1997).
10.16 -- Employment Agreement dated September 4, 1998 by and between the Registrant and Jon C. Biro (Filed as
Exhibit 10.20 to Form 10-K dated December 23, 1998)
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40
EXHIBIT NO. EXHIBIT
- ----------- -------
10.17 -- Employment Agreement dated September 4, 1998 by and between the Registrant and Isaac H. Joseph
(Filed as Exhibit 10.21 to Form 10-K dated December 23, 1998)
10.18** -- Employment Agreement dated September 4, 1998 by and between the Registrant and Robin E. Pacholder
10.19** -- Employment Agreement dated August 5, 1999 by and between the Registrant and David M. Gerst
21** -- Subsidiaries of the Company
23.1** -- Consent of Independent Accountants
27** -- Financial Data Schedule
- -----------------
** Filed herewith
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41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ICO, Inc.
By: /s/ Sylvia A. Pacholder
---------------------------------------------
Sylvia A. Pacholder, President and
Chief Executive Officer
(Principal Executive Officer)
Date: December 17, 1999
Pursuant to the requirements of the securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
------ ----- -----
/s/ Sylvia A. Pacholder Chief Executive Officer, President, December 17, 1999
----------------------------------- Secretary & Director
Sylvia A. Pacholder (Principal Executive Officer)
/s/ Asher O. Pacholder Chairman of the Board, Chief December 17, 1999
----------------------------------- Financial Officer & Director
Asher O. Pacholder (Principal Financial Officer)
/s/ Robin E. Pacholder President, Wedco-North America & December 17, 1999
----------------------------------- Director
Robin E. Pacholder
/s/ Jon C. Biro Senior Vice President and Treasurer December 17, 1999
----------------------------------- (Principal Accounting Officer)
Jon C. Biro
/s/ William E. Cornelius Director December 17, 1999
-----------------------------------
William E. Cornelius
/s/ James E. Gibson Director December 17, 1999
-----------------------------------
James E. Gibson
/s/ Walter L. Leib Director December 17, 1999
-----------------------------------
Walter L. Leib
/s/ William J. Morgan Director December 17, 1999
-----------------------------------
William J. Morgan
/s/ George S. Sirusas Director December 17, 1999
-----------------------------------
George S. Sirusas
/s/ John F. Williamson Director December 17, 1999
-----------------------------------
John F. Williamson
/s/ William E. Willoughby Director December 17, 1999
-----------------------------------
William E. Willoughby
39
42
ICO, INC. AND SUBSIDIARIES
FORM 10-K
INDEX OF FINANCIAL STATEMENTS
The following financial statements of ICO, Inc. and subsidiaries are required to
be included by Item 14(a):
Financial Statements: PAGE
----
Report of Independent Accountants......................................................................F-2
Consolidated Balance Sheet at September 30, 1999 and 1998..............................................F-3
Consolidated Statement of Operations for the three years
ended September 30, 1999...............................................................................F-4
Consolidated Statement of Cash Flows for the three years
ended September 30, 1999...............................................................................F-5
Consolidated Statement of Stockholders' Equity and
Accumulated Other Comprehensive Income (Loss)
for the three years ended September 30, 1999...........................................................F-6
Notes to Consolidated Financial Statements.............................................................F-7
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted or the
information is presented in the consolidated financial statements or related
notes.
F-1
43
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ICO, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing on page F-1 present fairly, in all material respects, the financial
position of ICO, Inc. and its subsidiaries at September 30, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Houston, Texas
December 10, 1999
F-2
44
ICO, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
ASSETS (In thousands, except share data)
Current assets:
Cash and cash equivalents $ 37,439 $ 51,135
Trade receivables (less allowance for doubtful accounts of $1,884 and
$1,690, respectively) 53,421 56,868
Inventories 26,592 29,963
Deferred tax asset 3,062 3,154
Prepaid expenses and other 3,524 4,320
---------- ----------
Total current assets 124,038 145,440
---------- ----------
Property, plant and equipment, at cost 188,346 184,683
Less - accumulated depreciation and amortization (73,760) (67,384)
---------- ----------
114,586 117,299
---------- ----------
Other assets:
Goodwill (less accumulated amortization of $8,185 and $6,592, respectively) 54,859 57,304
Debt offering costs 3,643 4,180
Other 2,709 4,454
---------- ----------
Total Assets $ 299,835 $ 328,677
========== ==========
LIABILITIES, STOCKHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities:
Short-term borrowings and current portion of long-term debt $ 10,009 $ 12,836
Accounts payable 22,860 24,220
Accrued interest 4,185 4,395
Accrued salaries and wages 3,818 2,372
Other accrued expenses 12,390 12,354
Income taxes payable 574 43
---------- ----------
Total current liabilities 53,836 56,220
Deferred income taxes 1,726 9,454
Long-term liabilities 1,671 2,056
Long-term debt, net of current portion 139,652 132,631
---------- ----------
Total Liabilities 196,885 200,361
---------- ----------
Commitments and contingencies (see Note 14) -- --
Stockholders' equity (see Note 10):
Preferred stock, without par value - 500,000 shares authorized; 322,500
shares issued and outstanding with a liquidation preference of $32,250 13 13
Junior participating preferred stock, without par value -
50,000 shares authorized; 0 shares issued and outstanding -- --
Common Stock, without par value - 50,000,000 shares authorized;
22,406,506 and 22,108,153 shares issued and outstanding, respectively 39,693 39,170
Additional paid-in capital 105,333 108,725
Accumulated other comprehensive loss (4,684) (1,890)
Accumulated deficit (37,405) (17,702)
---------- ----------
Total Stockholders' Equity 102,950 128,316
---------- ----------
$ 299,835 $ 328,677
========== ==========
The accompanying notes are an integral part of these financial statements.
F-3
45
ICO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands, except share data)
Revenues:
Sales $ 158,022 $ 149,088 $ 75,709
Services 104,351 132,255 122,333
---------- ---------- ----------
Total revenues 262,373 281,343 198,042
---------- ---------- ----------
Costs and expenses:
Cost of sales 133,027 127,256 65,252
Cost of services 68,617 84,600 76,050
Selling, general and administrative 42,158 45,022 31,981
Depreciation 14,316 12,532 10,050
Amortization of intangibles 2,758 2,857 1,299
Impairment of long-lived assets 9,291 -- --
Write-off of fixed assets 3,420 -- --
Severance expenses 2,499 -- --
Write-off of start-up costs 867 -- --
---------- ---------- ----------
Total costs and expenses 276,953 272,267 184,632
---------- ---------- ----------
Operating income (loss) (14,580) 9,076 13,410
---------- ---------- ----------
Other income (expense):
Gain on sale of equity investment -- 11,773 --
Interest income 1,921 3,771 2,001
Interest expense (13,831) (13,819) (5,765)
Equity in income of joint ventures -- -- 385
Other (51) (20) 217
---------- ---------- ----------
Income (loss) before taxes and extraordinary item (26,541) 10,781 10,248
Provision (benefit) for income taxes (6,439) 4,775 4,150
---------- ---------- ----------
Income (loss) before extraordinary item (20,102) 6,006 6,098
Extraordinary gain (see Note 3) 399 -- --
---------- ---------- ----------
Net income (loss) (19,703) 6,006 6,098
Preferred dividends (2,176) (2,176) (2,176)
---------- ---------- ----------
Net income (loss) applicable to common stock $ (21,879) $ 3,830 $ 3,922
========== ========== ==========
Basic earnings (loss) per share before
extraordinary item (see Note 3) $ (1.01) $ .18 $ .19
Extraordinary item .02 -- --
---------- ---------- ----------
Basic earnings (loss) per share $ (.99) $ .18 $ .19
========== ========== ==========
Diluted earnings (loss) per share before
extraordinary item (see Note 3) $ (1.01) $ .17 $ .19
Extraordinary item .02 -- --
---------- ---------- ----------
Diluted earnings (loss) per share $ (.99) $ .17 $ .19
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
46
ICO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
Cash flows from operating activities:
Net income (loss) $ (19,703) $ 6,006 $ 6,098
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 17,074 15,389 11,349
Gain on sale of equity investment -- (11,773) --
Write-off of fixed assets 3,420 -- --
Impairment of long-lived assets 9,291 -- --
Write-off of start-up costs 867 -- --
Equity in income of joint ventures -- -- (385)
Changes in assets and liabilities, net of the effects of business
acquisitions:
Receivables 3,724 (3,240) (3,586)
Inventories 3,031 (5,771) (7,312)
Prepaid expenses and other assets 242 (92) 47
Income taxes payable 166 (1,235) 772
Deferred taxes (8,402) 2,365 3,243
Accounts payable (1,212) (633) 3,839
Accrued interest -- 276 3,870
Accrued expenses 1,526 (1,111) (4,130)
---------- ---------- ----------
Total adjustments 29,727 (5,825) 7,707
---------- ---------- ----------
Net cash provided by operating activities 10,024 181 13,805
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (15,333) (26,143) (15,747)
Acquisitions, net of cash acquired (7,684) (17,492) (29,396)
Disposition of property, plant and equipment 423 2,010 907
Disposition of equity investment, net of expenses -- 13,679 --
---------- ---------- ----------
Net cash used for investing activities (22,594) (27,946) (44,236)
---------- ---------- ----------
Cash flows from financing activities:
Activity under stock option plans -- 1,546 794
Payment of dividend on preferred stock (2,176) (2,176) (2,176)
Payment of dividend on common stock (1,216) (4,823) (4,559)
Proceeds from issuance of debt 9,066 3,084 124,928
Payment of debt offering costs -- (145) (5,058)
Debt repayments (6,800) (2,478) (13,020)
---------- ---------- ----------
Net cash provided by (used for) financing activities (1,126) (4,992) 100,909
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (13,696) (32,757) 70,478
Cash and cash equivalents at beginning of year 51,135 83,892 13,414
---------- ---------- ----------
Cash and cash equivalents at end of year $ 37,439 $ 51,135 $ 83,892
========== ========== ==========
Supplemental Disclosures of Cash Flow Information:
Cash received (paid) during the period for:
Interest received $ 1,924 $ 3,747 $ 1,981
Interest paid $ (13,901) $ (12,359) $ (1,857)
Income taxes paid $ (1,318) $ (3,333) $ (1,269)
The accompanying notes are an integral part of these financial statements.
F-5
47
ICO, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Compre-
Common Additional hensive
Preferred Common Stock Stock Paid-In Income
Stock Shares Amount Capital (Loss)
--------- ------------ ------- ---------- ---------
(In thousands, except share data)
Balance at September 30, 1996 $ 13 19,682,494 $35,822 $ 102,429
Issuance of shares in connection with:
Acquisitions -- 1,712,365 17 8,022
Exercise of employee stock options -- 156,368 794 --
Employee Stock Ownership Plans -- 47,431 333 --
Convertible Exchangeable Preferred Stock Dividend (See Note 10) -- -- -- --
Common Stock Dividend (See Note 10) -- -- -- (637)
Translation adjustment -- -- -- -- (1,985)
Net income -- -- -- -- 6,098
--------
Comprehensive Income (Loss) -- -- -- -- 4,113
--------- ---------- ------- ----------
Balance at September 30, 1997 13 21,598,658 36,966 109,814
--------- ---------- ------- ----------
Issuance of shares in connection with:
Exercise of employee stock options -- 35,636 142 --
Employee Stock Ownership Plans -- 178,942 504 --
Exercise of Warrants -- 180,000 996 (96)
Debt conversion -- 114,917 562 --
Convertible Exchangeable Preferred Stock Dividend (See Note 10) -- -- -- --
Common Stock Dividend (See Note 10) -- -- -- (993)
Translation adjustment -- -- -- -- 63
Net income -- -- -- -- 6,006
--------
Comprehensive Income (Loss) -- -- -- -- 6,069
--------- ---------- ------- ----------
Balance at September 30, 1998 13 22,108,153 39,170 108,725
--------- ---------- ------- ----------
Issuance of shares in connection with
Employee Stock Ownership Plans -- 298,353 523 --
Convertible Exchangeable Preferred Stock Dividend (See Note 10) -- -- -- (2,176)
Common Stock Dividend (See Note 10) -- -- -- (1,216)
Translation adjustment -- -- -- -- (2,794)
Net income (loss) -- -- -- -- (19,703)
--------
Comprehensive Income (Loss) -- -- -- -- (22,497)
--------- ---------- ------- ----------
Balance at September 30, 1999 $ 13 22,406,506 $39,693 $ 105,333
========= ========== ======= ==========
Accumulated
Other
Comprehensive Accumulated
Income (Loss) Deficit
------------- -----------
(In thousands, except share data)
Balance at September 30, 1996 $ 32 $ (17,702)
Issuance of shares in connection with:
Acquisitions -- --
Exercise of employee stock options -- --
Employee Stock Ownership Plans -- --
Convertible Exchangeable Preferred Stock Dividend (See Note 10) -- (2,176)
Common Stock Dividend (See Note 10) -- (3,922)
Translation adjustment (1,985) --
Net income -- 6,098
Comprehensive Income (Loss) -- --
---------- ----------
Balance at September 30, 1997 (1,953) (17,702)
---------- ----------
Issuance of shares in connection with:
Exercise of employee stock options -- --
Employee Stock Ownership Plans -- --
Exercise of Warrants -- --
Debt conversion -- --
Convertible Exchangeable Preferred Stock Dividend (See Note 10) -- (2,176)
Common Stock Dividend (See Note 10) -- (3,830)
Translation adjustment 63 --
Net income -- 6,006
Comprehensive Income (Loss) -- --
---------- ----------
Balance at September 30, 1998 (1,890) (17,702)
---------- ----------
Issuance of shares in connection with
Employee Stock Ownership Plans -- --
Convertible Exchangeable Preferred Stock Dividend (See Note 10) -- --
Common Stock Dividend (See Note 10) -- --
Translation adjustment (2,794) --
Net income (loss) -- (19,703)
Comprehensive Income (Loss) -- --
---------- ----------
Balance at September 30, 1999 $ (4,684) $ (37,405)
========== ==========
The accompanying notes are an integral part of these financial statements.
F-6
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - ICO, Inc. and its subsidiaries ("ICO" or the
"Company") serve the global energy, petrochemical and steel industries,
providing high technology equipment manufacturing, inspection, reconditioning
and coating of oilfield tubulars and sucker rods, and plastics processing
services.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of ICO, Inc. and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, if any, at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The more significant areas requiring use
of estimates relate to post-retirement and other employee benefit liabilities,
valuation allowances for deferred tax assets, and fair value of financial
instruments. Actual results could differ from these estimates. Management
believes that its estimates are reasonable.
SEGMENT INFORMATION - The Company operates in two industry segments.
The Company serves the petrochemical industry by providing customers with
size-reduction, compounding, and other related services for heat sensitive
thermoplastic and other materials, producing concentrates and manufacturing
certain machinery used for those services and by serving as a distributor of
specialty petrochemicals, processed by the Company. The Company operates in the
petrochemical industry in the United States, Europe and Southeast Asia. The
Company also serves the energy and steel industries by providing oilfield
tubular and sucker rod inspection, reconditioning, and coating services and
equipment, operating in many of the significant oil and gas producing regions
and active exploration areas of the Continental United States and Canada. See
Note 16 - "Segment and Foreign Operations Information".
JOINT VENTURES - Joint ventures included in the Company's financial
results for the years ended September 30, 1998 and 1997 are: Micronyl-Wedco
S.A., a size-reduction and custom compounding company with locations in
Beaucaire and Montereau, France, 50% owned by the Company until April 1997; and
WedTech, Inc., a size-reduction and custom compounding company headquartered in
Canada that was 50% owned by the Company until January 1998. The Company
acquired a 50% interest in WedTech in connection with the April 1996 Wedco
acquisition. This investment was accounted for using the cost method of
accounting throughout 1996 and up through May 1, 1997, at which time the Company
resolved certain legal issues surrounding its ability to exercise significant
influence over WedTech; from that point forward until disposition, the Company
accounted for WedTech using the equity method of accounting, and prior period
operating results were immaterial for restatement from cost to equity method
accounting. During fiscal year 1997, the Company accounted for Micronyl-Wedco
S.A. using the equity method until April of 1997, at which time the remaining
50% interest was acquired by the Company. During December of 1997, the Company
sold its 50% interest in WedTech to the Company's joint venture partner. Under
the equity method, investments are recorded at cost and adjusted by the
Company's share of undistributed earnings or losses. The Company had no joint
ventures during fiscal 1999.
REVENUE AND RELATED COST RECOGNITION - The Company generally recognizes
revenue from services upon completion of the services and related expenses are
generally recognized as incurred. For product and machinery sales, revenues and
related expenses are recognized when title is transferred, generally when the
products are shipped.
F-7
49
INVENTORIES - Inventories are stated at the lower of cost or market,
cost being determined by the first-in, first-out method.
CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid
debt securities with a maturity of three months or less when purchased to be
cash equivalents. Those securities are readily convertible to known amounts of
cash, and bear insignificant risk of changes in value due to their short
maturity period.
PROPERTY, PLANT AND EQUIPMENT - The costs of property, plant and
equipment, including renewals and improvements which extend the life of existing
properties, are capitalized and depreciated using the straight-line method over
the estimated useful lives of the various classes of assets as follows:
CLASSIFICATION YEARS
-------------- -----
Site improvements..............................................2-25
Buildings.....................................................15-25
Machinery and equipment........................................1-20
Transportation equipment.......................................3-10
Leasehold improvements are amortized on a straight-line basis over the
lesser of the economic life of the asset or the lease term. Expenditures for
normal maintenance and repairs are expensed as incurred. The cost of property,
plant and equipment sold or otherwise retired and the related accumulated
depreciation are removed from the accounts and any resultant gain or loss is
included in operating results.
IMPAIRMENT OF LONG-LIVED ASSETS - SFAS No. 121 prescribes that an
impairment loss is recognized in the event facts and circumstances indicate that
the carrying amount of an asset may not be recoverable, and an estimate of
future undiscounted cash flows is less than the carrying amount of the asset.
Impairment is recorded based on a determination of fair market value as compared
to carrying value.
GOODWILL - The excess purchase price over fair value of net tangible
assets (i.e. goodwill), is being amortized on a straight-line basis over 40
years. Goodwill is reviewed for impairment in accordance with SFAS No. 121.
PATENTS AND LICENSES - The cost of patents, patent rights and license
agreements is generally amortized over the remaining legal lives of the patents
or agreements on a straight-line basis, averaging approximately ten years.
CURRENCY TRANSLATION - Amounts in foreign currencies are translated
into U.S. dollars using the translation procedures specified in SFAS No. 52,
"Foreign Currency Translation." When local functional currency is translated to
U.S. dollars, the effects are recorded as a separate component of Other
Comprehensive Income. Exchange gains and losses resulting from foreign currency
transactions are generally recognized in earnings. Net foreign currency
transaction gains or losses are not material in any of the periods presented.
ENVIRONMENTAL - Environmental expenditures that relate to current
operations are expensed as incurred. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are also expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable and the costs can
be reasonably estimated. Generally, the timing of these accruals coincides with
the earlier of completion of a feasibility study or the Company's commitment to
a formal plan of action.
STOCK-BASED COMPENSATION - The Company accounts for employee
stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." In 1997, the Company adopted the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" (See Note 11).
F-8
50
CONCENTRATION OF CREDIT RISK - The market for the Company's services is
the petrochemical and oil and gas industries. Within the petrochemical
processing segment, primary customers include manufacturers of plastic products
and large producers of petrochemicals, which include major chemical companies
and petrochemical production affiliates of major oil production companies. The
Company's customers, within the oilfield service business include several of the
leading integrated oil companies, large independent oil and gas exploration and
production companies, drilling contractors, steel producers and processors and
supply companies. Worldwide sales to one petrochemical customer accounted for
approximately 13% of consolidated fiscal year 1999 revenues.
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of trade receivables. The
Company provides allowances for potential credit losses when necessary.
Accordingly, management considers such credit risk to be limited.
INCOME TAXES - The Company accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes." The provision for income taxes includes
federal, state, and foreign income taxes currently payable and deferred based on
currently enacted tax laws. Deferred income taxes are provided for the tax
consequences of differences between the financial statement and tax bases of
assets and liabilities.
The Company does not provide for U.S. income taxes on foreign
subsidiaries' undistributed earnings intended to be permanently reinvested in
foreign operations.
EARNINGS (LOSS) PER COMMON SHARE - The Company calculates earnings per
share ("EPS") in accordance with Statement of Financial Accounting Standard No.
128 ("SFAS 128"), "Earnings Per Share." SFAS 128 requires the presentation of
both basic and diluted EPS amounts. The requirements for calculating basic EPS
excludes the dilutive effect of securities. Diluted EPS assumes the conversion
of all dilutive securities. The weighted average shares outstanding for the
years ended September 30, 1999, 1998 and 1997 were increased by 19,445, 127,082,
and 225,461 shares, respectively, to reflect the conversion of all potentially
dilutive securities.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial
instruments consist of cash and cash equivalents, accounts receivable, accounts
payable, and long-term debt. The carrying amounts of cash and cash equivalents,
accounts receivable, and accounts payable approximate fair value due to the
highly liquid nature of these short-term instruments. Except for the Senior
Notes indebtedness, the aggregate fair value of the Company's long-term debt, as
determined using interest rates currently available to the Company for
borrowings with similar terms, approximates the aggregate carrying amount as of
September 30, 1999. The Senior Notes long-term debt, with a face value of
$118,000 had a fair market value of approximately $109,150 at December 10, 1999.
RECLASSIFICATIONS - Certain reclassifications have been made to the
prior year amounts in order to conform to the current year classifications.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - During June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which requires that companies
recognize all derivative instruments as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Due to the Company's
limited use of derivative instruments, the impact of adopting SFAS No. 133 is
not expected to be material to the Company's financial statements. The Company
was required to adopt SFAS No. 133 in its financial statements for the fiscal
year ending September 30, 2000. However, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," deferred the implementation of SFAS 133 until the
fiscal year ending September 30, 2001.
During April 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities", which requires that companies expense as incurred costs of
start-up activities and organization costs. The Company is required to adopt SOP
98-5 in its financial statements for the fiscal year ending September 30, 2000.
The adoption of this SOP is not expected to be material to the Company's
financial statements.
F-9
51
NOTE 2 - ACQUISITIONS
The Company entered into the following business combinations during
fiscal years 1999, 1998 and 1997. All such transactions were accounted for using
the purchase method of accounting under APB No. 16, "Accounting for Business
Combinations." Accordingly, operating results of the acquired companies are
included with the Company's consolidated results of operations from the
respective acquisition dates.
1999 ACQUISITION
During February 1999, the Company acquired MilCorp Holdings, Inc. and
MilCorp Industries, Ltd. (collectively "MilCorp") for $7,653 in cash and the
assumption of approximately $4,144 of debt. MilCorp is a leading provider of
fully integrated services for oil country tubular goods, including trucking,
inventory management, inspection and internal coating. MilCorp has facilities
located on 160 acres near Edmonton, Alberta, in the energy-producing region of
Western Canada. MilCorp has been in business for more than fifty years and its
customers include many of Western Canada's large energy companies and drilling
contractors.
1998 ACQUISITIONS
During June 1998, the Company acquired Soreco S.A. ("Soreco") and its
wholly-owned subsidiary for approximately $1,600 in cash and the assumption of
approximately $236 in debt. Soreco, which is strategically located in the French
"Plastics Valley", provides high quality color matching and color compounding
services for engineering plastics. Soreco's customer base includes manufacturers
of consumer products such as appliances, electronics, cosmetics and other
products which require colors with high consistency. Soreco uses sophisticated
single pigment coloration techniques to provide rapid turnaround for color
matching and compounding services and has an extensive library of proprietary
color formulations.
During March 1998, the Company acquired J.R. Courtenay (N.Z.) Ltd.
("JRC") and its wholly-owned subsidiary, Courtenay Polymers Pty. Ltd. ("CPPL"),
for $14,124 in cash and the assumption of approximately $500 in debt. JRC and
CPPL are located in Auckland, New Zealand and Melbourne, Australia,
respectively, and are leading providers of polymer powders to the rotational
molding and metal coating industries in New Zealand and Australia. These
companies sell an extensive line of materials using proprietary formulations
under the Cotene(TM) brand name and also provide a complete range of size
reduction and compounding services.
During December 1997, the Company acquired the operating assets of
Curley's Inspection Service, Inc. ("Curley's"). The consideration consisted of
$2,000 in cash and is subject to adjustment based upon future operating
revenues. Curley's provides drill pipe and casing inspection services from
locations in Texas and New Mexico.
1997 ACQUISITIONS
During September 1997, the Company acquired the operating assets of
NSpection Systems, Inc. for $600 in cash and future royalty payments based on
sales. NSpection provides electromagnetic inspection and related services for
new and used tubing, casing and drill pipe utilizing two locations in Houston,
Texas.
During July 1997, the Company acquired Verplast S.p.A. ("Verplast"),
which included Tec-Ma Srl, a wholly-owned subsidiary of Verplast, for a total
consideration of approximately $35,100, consisting of approximately $18,700 in
cash and the effective assumption of $16,400 in total liabilities. Verplast and
Tec-Ma are located in northern Italy, and are suppliers of petrochemical
processing services and value-added plastic materials for the rotational molding
market and for other plastic powder applications.
During May 1997, the Company acquired the remaining 50% ownership of
Micronyl-Wedco S.A. not already owned by the Company for a total consideration
of approximately $7,600, consisting of approximately
F-10
52
$2,600 in cash and the effective assumption of $5,000 in total liabilities.
Wedco France, as this entity is now known, operates two size reduction
facilities in France which perform services similar to those performed by the
Company's other petrochemical size reduction facilities.
During April 1997, the Company acquired Rotec for a total consideration
of approximately $7,800, consisting of approximately $2,500 in cash, 427,353
shares of Company common stock valued at approximately $2,100 and the effective
assumption of $3,200 in total liabilities. In addition, Rotec shareholders may
be entitled to additional consideration in cash and Company common stock based
on future earnings of Rotec. Rotec serves the United Kingdom, Ireland and
Continental Europe markets and is a producer of high quality concentrates for a
variety of plastics processes.
During April 1997, the Company acquired the micropowders business of
Exxon Chemical Belgium (the "Micropowders Business"). The consideration
consisted of an initial payment of $500 and five additional payments of 674
Dutch Guilders ("Dfl") ($326 at September 30, 1999 exchange rates) payable for
each of five years beginning one year after the acquisition date. As of
September 30, 1999, Dfl 2,024 ($978 at September 30, 1999 exchange rates)
remains outstanding. The Company also purchased inventory from Exxon Chemical
Belgium and entered into a supply agreement with Exxon Chemical Holland to
acquire inventories in the future.
During December 1996, the Company acquired Bayshore Industrial, Inc.
("Bayshore") for a total consideration of approximately $18,500, consisting of
approximately $6,900 in cash, 1,285,012 shares of Company common stock valued at
approximately $5,900 and the effective assumption of $5,700 in total
liabilities. Bayshore is a provider of concentrates and compounds to resin
producers in the United States.
NOTE 3 - EXTRAORDINARY ITEM
During fiscal 1999 the Company repurchased Senior Notes with a face
value of $2,000, at a discount, recognizing a pre-tax gain of $614 and an
after-tax gain of $399.
NOTE 4 - SPECIAL ITEMS
During fiscal 1999, the Company recognized a non-cash $9,291 charge for
the impairment of long-lived assets. $748 of this charge relates to the oilfield
services business, of which $310 of the write-down related to the impairment of
goodwill and the remaining to machinery and equipment. $8,543 of the total
charge relates to the petrochemical business and reflects the impairment of four
underperforming facilities. $4,812 of the petrochemical charge includes the
impairment of goodwill and $3,489 consists of machinery and equipment
impairment. The amount of goodwill impairment was determined by comparing
estimated future cash flows, on a discounted basis, to the carrying value of the
facility evaluated including the amount of goodwill originally allocated to the
facility at the time of acquisition. The amount of the machinery and equipment
impairments were determined by comparing fair values with the corresponding
carrying values of the assets evaluated. Fair value was determined as the
estimated current market value of the assets evaluated.
During fiscal 1999, the Company reduced the carrying value of property,
plant and equipment primarily due to assets which are obsolete or are not in
working order and will not be used in the future. Of the non-cash $3,420
write-off, $2,779 related to the petrochemical business and $641 related to the
oilfield service segment.
The Company, during fiscal 1999, recorded a write-down of $1,507
(included in cost of sales) to reduce inventory values to estimated market
selling prices (mostly within the oilfield service business), to reflect current
market conditions.
Severance expenses of $2,499 relating to terminated employees were
recognized during fiscal 1999, in large part due to European management changes
during the third quarter of fiscal year 1999.
F-11
53
During fiscal 1999, the Company wrote-off $867 start-up costs primarily
relating to the closure, during the second quarter of fiscal 1999, of an
operation which had capitalized start-up costs.
During the first quarter of fiscal 1998, management provided a $1,200
accrual for certain legal matters which management felt would result in a charge
to income and could be reasonably estimated (included in selling, general and
administrative expenses). Subsequent to the first quarter of fiscal 1998, these
matters were settled and the total expenses incurred by the Company were
reasonably consistent with the previously recognized litigation charge.
NOTE 5 - INVENTORIES
Inventories at September 30 consisted of the following:
1999 1998
------- -------
Finished goods $10,947 $14,292
Raw materials 11,353 10,302
Work in progress 933 1,491
Supplies 3,359 3,878
------- -------
$26,592 $29,963
======= =======
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following at
September 30:
1999 1998
-------- ---------
Land and site improvements $ 24,496 $ 23,082
Buildings 35,041 32,540
Machinery and equipment 115,085 115,982
Transportation equipment 3,411 1,549
Leasehold improvements 2,118 1,695
Construction in progress 8,195 9,835
-------- ---------
188,346 184,683
Accumulated depreciation (73,760) (67,384)
-------- ---------
$114,586 $ 117,299
======== =========
Depreciation expense was $14,316, $12,532, and $10,050 for the three fiscal
years ended September 30, 1999, 1998 and 1997, respectively.
F-12
54
NOTE 7 - LONG-TERM DEBT
Long-term debt at September 30, 1999 and 1998 consists of the
following. Obligations denominated in a foreign currency have been translated
using year-end exchange rates.
1999 1998
----------------- ------------------
10 3/8% Series B Senior Notes, interest payable semi-annually, principal due
2007. $118,000 $120,000
Term loan of the Company's Italian subsidiary collateralized by certain land,
buildings, and machinery and equipment of the subsidiary . Principal and
interest paid quarterly with an interest rate of 5.90% through June 2009. 6,538 --
Term loan of the Company's Canadian subsidiary collateralized by accounts
receivable, inventory, and machinery and equipment of the subsidiary. Interest
and principal paid monthly with an interest rate of 7.50% through July 2004. 3,870 --
Term loan of the Company's Italian subsidiary collateralized by land and buildings
of the subsidiary. Increasing principal payments are made quarterly beginning
May 2000 through March 2005. Interest paid quarterly at 5.90%. 1,649 1,817
Mortgage loan payable of one of the Company's Dutch subsidiaries, collateralized
by mortgages on certain buildings of the subsidiary, as well as a keepwell
letter signed by the Company. Principal payments on the loan are payable in
quarterly installments of Dfl 101 ($49). Interest is payable in quarterly
installments at a fixed rate of 7.20%. 1,373 1,671
Mortgage loan payable of one of the Company's British subsidiaries, collateralized
by a mortgage on the assets of that subsidiary as well as a keepwell letter signed by
the Company. Principal payment on the loan amounts to GBP 8 ($13) and is payable
in monthly installments through October 2007. The interest rate is payable
monthly at a fixed rate of 8.33%. 1,330 1,544
Interest-free term loan of one of the Company's Dutch subsidiaries. Principal
payable annually, in equal installments, over 5 years beginning April 1997. 978 1,432
Mortgage loan payable of one of the Company's British subsidiaries,
collateralized by a mortgage on all of the assets of that subsidiary as well as
a keepwell letter signed by the Company. Principal payment on the loan amounts
to GBP 8 ($13) and is payable in monthly installments through June 2006.
Interest is payable monthly at a fixed rate of 8.90%. 1,111 1,317
Term loan of one of the Company's British subsidiaries, collateralized by current
assets of the subsidiary. Payment is due in 2004 and interest is payable semi-
annually at 8.39% 1,234 1,275
F-13
55
1999 1998
------------------ ------------------
Mortgage loans payable of one of the Company's Dutch subsidiaries,
collateralized by mortgages on certain land and buildings of the subsidiary as
well as a keepwell letter duly signed by the Company. Principal payments on
these loans are Dfl 150 ($72) and are payable in semi-annual and annual
installments. Interest is payable in quarterly installments at a fixed rate of
6.80%. 1,014 1,274
Mortgage loan carrying a 9.2% fixed rate with monthly payments of principal and
interest of $18 through October 1, 2006. Loan is collateralized by a mortgage on
certain domestic property. 1,121 1,230
Various secured loan agreements of the Company's French subsidiaries
collateralized by certain buildings and equipment of the subsidiary. The loan
agreements carry various maturities and interest rates ranging from 3.74% to
7.33%. Interest and principal paid monthly or quarterly. 618 918
Various other 3,653 2,267
----------------- ------------------
Total 142,489 134,745
Less current maturities (2,837) (2,114)
----------------- ------------------
Long-term debt less current maturities $ 139,652 $ 132,631
================= ==================
In June 1997, the Company issued the Series A Senior Notes at face
value and received proceeds of $114,797 net of offering costs of $5,203.
Offering costs are amortized over the term of the Senior Notes and, as of
September 30, 1999, accumulated amortization of debt offering costs totaled
$1,560. Pursuant to the note indenture, 35% of the outstanding Senior Notes may
be redeemed through June of 2000 using proceeds of a public equity offering.
Beginning in June of 2002, the Company may, at its option, redeem the Senior
Notes at various premiums depending upon the redemption date. The terms of the
Senior Notes limit the amount of additional indebtedness incurred by the Company
and its subsidiaries and restrict certain payments, specifically dividends on
preferred and common stock. The terms, however, do allow for dividend payments
on currently outstanding preferred stock in accordance with the terms of the
preferred stock and up to $.22 per share per annum on common stock in the
absence of any default or event of default on the Senior Notes. The above
dividend limitations may not be decreased, but may be increased, based upon the
Company's results of operations and other factors. In November 1997, the Company
completed an exchange of 100% of the unregistered Series A Notes for registered
103/8% Series B Notes due 2007, with essentially equivalent terms.
Maturities of the Company's debt are as follows:
YEARS ENDED
SEPTEMBER 30, AMOUNTS
-------------- ----------
2000 $ 2,837
2001 2,567
2002 2,515
2003 2,286
2004 3,573
Thereafter 128,711
F-14
56
NOTE 8 - CREDIT ARRANGEMENTS
The Company maintains several foreign lines of credit through its
wholly-owned subsidiaries. These facilities totaled $17,260 at September 30,
1999. The facilities are collateralized by certain assets of the foreign
subsidiaries. Borrowings under these agreements, classified as short term
borrowings on the consolidated balance sheet, totaled $7,172 at September 30,
1999.
The weighted average interest rate charged on short-term borrowings
under the Company's various credit facilities at September 30, 1999 was 4.12%.
NOTE 9 - INVESTMENT IN JOINT VENTURES
During February 1996, Wedco commenced legal action against WedTech,
Inc., a Canadian corporation ("WedTech"), which was, at that time, owned 50% by
Wedco and 50% by Polyvector Corporation, a Canadian corporation, which is also a
defendant in the action. Such litigation was assumed by the Company in
connection with its April 1996 acquisition of Wedco. As successor to such
claims, the Company alleged, among other things, that the various defendants
breached the terms of the shareholders' agreement among Wedco and the
defendants. The defendants also filed counterclaims in the action alleging that
ICO and Wedco breached the shareholders' agreement. Due to these circumstances,
including the then ongoing litigation, the Company did not have the ability to
exercise significant influence over WedTech for the first seven months of fiscal
year 1997, and thus the cost method of accounting was applied to this investment
during those periods. In April 1997, as a result of a court order, the Company's
designated board member and officer of WedTech were appointed, and management of
the Company considered significant influence to have existed from that point
forward, as defined by accounting authoritative guidance. As a result of the
change in circumstances, the Company began accounting for its investment in
WedTech using the equity method of accounting in May 1997; operating results for
periods prior thereto were immaterial for restatement from cost to equity method
accounting. During the first quarter of fiscal 1998, the Company sold its
investment in WedTech to Polyvector for $14,484 and recognized a pre-tax gain of
$11,773.
NOTE 10 - SHAREHOLDERS' EQUITY
During November 1993, the Company completed an offering of Convertible
Exchangeable Preferred Stock ("Preferred Stock"). The shares of Preferred Stock
are evidenced by Depositary Shares, each representing one-quarter of a share of
Preferred Stock. A total of 1,290,000 Depositary Shares were sold at a price of
$25 per share. Each Preferred Share is convertible into 10.96 common shares
(equivalent to 2.74 common shares per Depositary Share) at a conversion price of
$9.125 per common share subject to adjustment upon the occurrence of certain
events. The Board of Directors approved the recording of the Preferred Stock
offering by allocating $.01 per Depositary Share to Preferred Stock and the
remainder to additional paid-in capital. Preferred Stock dividends of $1.6875
per depositary share are paid annually.
Cash dividends paid during the fiscal years ended September 30, 1999
and 1998 equaled $2,176 during both years on the Company's Preferred Stock.
Cumulative liquidating dividends on the Company's Preferred Stock paid out of
Additional Paid-in Capital through September 30, 1999 totaled $4,955.
Cash dividends paid during the fiscal years ended September 30, 1999
and 1998 equaled $1,216 and $4,823, respectively, on the Company's common stock,
of which $1,216 and $993, respectively, represented a liquidating dividend paid
from Additional Paid-in Capital. Cumulative liquidating dividends on the
Company's common stock paid out of Additional Paid-in Capital through September
30, 1999 totaled $5,676.
In connection with the Company's 1992 debt restructuring, 801,750
Common Stock Purchase Warrants (expiring July 2002) were issued and are
outstanding and currently exercisable at $5.00 as of September 30, 1997.
F-15
57
During the year ended September 30, 1998, 180,000 of these warrants were
exercised and the Company received proceeds of $900.
On October 31, 1997, the Board of Directors adopted a Shareholders'
Rights Plan (the "Rights Plan") and declared a dividend of one Junior
Participating Preferred Share purchase right with respect to each share of
common stock outstanding at the close of business on November 21, 1997. The
rights are designed to assure that all Shareholders receive fair and equal
treatment in the event of any proposed takeover of the Company and to encourage
a potential acquirer to negotiate with the Board of Directors prior to
attempting a takeover. It includes safeguards against partial or two-tiered
tender offers, squeeze-out mergers and other abusive takeover tactics to gain
control of ICO without paying all Shareholders a control premium. Each right
entitles the holder to purchase one-thousandth of a share of a newly authorized
series of the Company's preferred stock at a purchase price of $30. Each
one-thousandth of a share of such preferred stock is intended to be the economic
and voting equivalent of one share of common stock. The rights are not presently
exercisable, and are currently evidenced by the Company's common stock
certificates and trade automatically with the common stock.
In the event any person or group commences a tender or exchange offer
that, if consummated, would result in such person or group becoming the
beneficial owner of 15% or more of ICO's common stock, then after a specified
period, separate rights certificates will be distributed and each right will
entitle its holder to purchase one-thousandth of a share of such preferred stock
at a purchase price of $30.
In the event a person or group acquires beneficial ownership of 15% or
more of the Company's common stock, then, after a specified period, each right
(other than Rights beneficially owned by such person or group, which become
void) will entitle its holder to purchase, at the purchase price, shares of the
Company's common stock, (or, at the option of the Board, such preferred stock)
having a market value equal to twice the purchase price. Additionally, if after
any such person or group acquires beneficial ownership of 15% or more of ICO's
common stock, the Company is acquired in a merger or other business combination
or 50% or more of its consolidated assets or earning power are sold, each right
(other than rights beneficially owned by such person or group, which will have
become void) will entitle its holder to purchase, at the purchase price, shares
of common stock of the person or group with whom the Company engaged in such
transaction having a market value equal to twice the purchase price.
Under certain circumstances, the Company may, at its option, exchange
for each outstanding right (other than voided rights) one share of common stock
or one-thousandth of a share of such preferred stock. The Company may also, at
its option, redeem the rights at a price of $.01 per right at any time prior to
a specified period of time after a person or group has become the beneficial
owner of 15% or more of its common stock.
The Rights will expire on November 20, 2007, unless earlier redeemed.
F-16
58
NOTE 11 - STOCK OPTION PLANS AND COMMON STOCK WARRANTS
The table below summarizes the Company's six stock option plans. The
number of options indicates the number of common shares underlying the options
authorized by the Company's Board of Directors and shareholders. All the plans
allow grants for 10 years from each plan's effective date. All options granted
to date are currently vested, however, future options granted may carry vesting
schedules at the discretion of a committee of the Board of Directors.
PLAN NUMBER OF OPTIONS EFFECTIVE DATE OF PLAN
- ----------------------------------- ----------------- ----------------------
1998 Stock Option Plan 600,000 January 12, 1998
1996 Stock Option Plan 800,000 August 29, 1996
1995 Stock Option Plan 400,000 August 15, 1995
1994 Stock Option Plan 400,000 July 1, 1994
1993 Restated Non-Employee Director
Stock Option Plan 310,000 June 16, 1993
1985 Stock Option Plan 310,000 January 2, 1985
For all of the above plans, shares of common stock are reserved for
grant to certain officers, key employees and non-employee directors at a price
not less than 100% of the fair market value of the stock at the date of grant.
There were 709,050, 538,700, and 174,000 shares available for grant at September
30, 1999, 1998 and 1997, respectively. The following is a summary of stock
option activity for the three years ended September 30:
1999 1998 1997
----------------------------- -------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
FIXED OPTIONS SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
- ---------------------------------- (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE (000'S) EXERCISE PRICE
---------- -------------- ------- -------------- ------- ---------------
Outstanding at beginning
of year.......................... 1,591 $ 5.68 1,407 $ 5.80 810 $ 5.18
Granted........................... 226 1.25 322 4.99 770 6.26
Exercised......................... -- -- (36) 4.89 (156) 4.96
Forfeited......................... (250) 5.33 (102) 5.68 (17) 5.09
------- ------ ------
Outstanding at end of year........ 1,567 $ 5.10 1,591 $ 5.68 1,407 $ 5.80
======= ====== ======
Options exercisable at year end... 1,567 $ 5.10 1,591 $ 5.68 1,407 $ 5.80
======= ====== ======
1999 1998 1997
----------------------------- -------------------------- -------------------------
Weighted average fair value of
options granted during year
($/share) ........................ $ 0.81 $ 1.46 $ 2.15
F-17
59
The following table summarizes information about fixed stock options outstanding
at September 30, 1999:
NUMBER OUTSTANDING WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES AT 9/30/99 (000'S) REMAINING CONTRACTUAL LIFE EXERCISE PRICE
- -------------------------- -------------------- --------------------------- --------------
$0.00 - $2.99 224 9 years $ 1.25
$3.00 - $5.25 566 6 years $ 4.80
$5.31 - $7.19 720 6 years $ 6.32
$7.22 - $9.75 57 7 years $ 7.76
-------
1,567
=======
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, which established financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages companies to
adopt a fair value based method of accounting for such plans, but continues to
allow the use of the intrinsic value method prescribed by APB 25. The Company
has elected to continue to account for stock-based compensation in accordance
with APB 25. If the Company had elected to recognize compensation cost based on
the fair value of the options granted at grant date as prescribed by SFAS No.
123, net income (loss) and earnings (loss) per share would have been reduced to
the pro forma amounts indicated in the table below:
1999 1998 1997
--------------------------- -------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
Net income (loss) $(19,703) $(19,885) $ 6,006 $ 5,555 $ 6,098 $ 4,439
Basic EPS (0.99) (1.00) $ 0.18 $ 0.15 $ 0.19 $ 0.11
Diluted EPS (0.99) (1.00) $ 0.17 $ 0.15 $ 0.19 $ 0.11
The fair value of each option grant is estimated on the date of the
grant using the Noreen-Wolfson option-pricing model, which is the Black-Scholes
model adjusted for the dilutive impact which the conversion of the options will
have on the Company's stock price, with the following assumptions:
1999 1998 1997
--------- --------- ---------
Expected life of options 7.4 years 7.5 years 7.3 years
Expected dividend yield over life of options 0% 3.57% 3.50%
Expected stock price volatility 50.40% 31.00% 37.10%
Risk-free interest rate 5.60% 5.60% 6.40%
NOTE 12 - INCOME TAXES
The amounts of income (loss) before income taxes attributable to
domestic and foreign operations are as follows:
YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1999 1998 1997
-------- -------- --------
Domestic $(28,025) $ 5,884 $ 5,492
Foreign 1,484 4,897 4,756
-------- -------- --------
$(26,541) $ 10,781 $ 10,248
======== ======== ========
F-18
60
The provision for income taxes consists of the following:
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Current:
Federal $ (370) $ -- $ 44
State -- 892 149
Foreign 1,789 2,146 2,024
---------- ---------- ----------
1,419 3,038 2,217
---------- ---------- ----------
Deferred:
Federal (7,491) 2,704 1,707
State -- 434 353
Foreign (367) (1,401) (127)
---------- ---------- ----------
(7,858) 1,737 1,933
---------- ---------- ----------
Total:
Federal (7,861) 2,704 1,751
State -- 1,326 502
Foreign 1,422 745 1,897
---------- ---------- ----------
$ (6,439) $ 4,775 $ 4,150
========== ========== ==========
A reconciliation of the income tax expense (benefit) at the federal
statutory rate (35%) to the Company's effective rate is as follows:
YEARS ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Tax expense (benefit) at statutory rate $ (9,289) $ 3,773 $ 3,586
Change in the deferred tax assets valuation allowance (61) (110) --
Non-deductible expenses and other, net 2 806 (387)
Foreign tax rate differential 903 (968) 233
Goodwill amortization and write-downs 2,006 259 268
State taxes, net -- 1,015 450
---------- ---------- ----------
$ (6,439) $ 4,775 $ 4,150
========== ========== ==========
F-19
61
Deferred tax assets (liabilities) result from the cumulative effect of
temporary differences in the recognition of expenses (revenues) between tax
returns and financial statements. The significant components of the balances are
as follows:
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
Deferred tax assets:
Net operating and capital loss carryforwards $ 8,637 $ 1,831
Tax credit carryforward 654 965
Insurance accruals 915 724
Other accruals 98 405
Bad debt allowance 421 278
Compensation accruals 792 539
Legal accruals 310 236
Depreciation 731 --
Inventory 388 306
Other 1055 564
---------- ----------
14,001 5,848
---------- ----------
Deferred tax liabilities:
Depreciation and land (10,235) (10,238)
Deferred revenue (637) (281)
Other (224) --
---------- ----------
(11,096) (10,519)
---------- ----------
Valuation allowance on deferred tax assets (1,569) (1,629)
---------- ----------
Net deferred tax assets (liabilities) $ 1,336 $ (6,300)
========== ==========
The Company reduced the valuation allowance during 1998 and 1999 to
reflect the expiration of certain federal tax credits. The Company further
reduced the valuation allowance in 1998 to reflect the utilization and
expiration of capital losses. A valuation allowance is established when it is
more likely than not that some or all of the deferred tax asset will not be
realized.
The Company has for tax purposes $23,904 in net operating loss
carryforwards, which expire between 2001 and 2019, and $489 in investment and
other tax credit carryforwards which, if utilized, will result in a cash
savings. Net operating loss carryforwards in the amount of $2,311 and all of the
tax credits are expected to expire unused.
A change in ownership under the Internal Revenue Code has occurred
which limits the utilization of part of the Company's NOLs and credits to
approximately $677 each year through their expiration.
The Company does not provide for U.S. income taxes on foreign
subsidiaries' undistributed earnings intended to be permanently reinvested in
foreign operations. It is not practicable to estimate the amount of additional
tax that might be payable should the earnings be remitted or deemed remitted or
should the Company sell it stock in the subsidiaries.
F-20
62
NOTE 13 - EMPLOYEE BENEFIT PLANS
The Company maintains several benefit plans which cover all domestic
employees that meet certain eligibility requirements related to age and service
time with the Company. The plan in which each employee is eligible to
participate depends upon the subsidiary the employee is employed by. All plans
have a salary deferral feature which allow employees to contribute up to a
certain percentage of their earnings, subject to governmental regulations. The
Company matches the employee's contribution with ICO stock or a monetary
contribution. An employee's interest in the Company's contributions and earnings
is vested over service dates ranging from one year of service to seven years of
service, depending on the plan.
Wedco Holland B.V. maintains a contributory defined benefit pension
plan, in which all employees of Wedco Holland B.V. who are at least 25 years of
age and have completed one year of service are eligible to participate.
Participants contribute 2.5% to 4% of the cost associated with their individual
pension basis. The Company contributes an annual amount based on an actuarial
calculation according to Dutch accounting principles. The plan provides
retirement benefits at the normal retirement age of 65 in an annual amount equal
to the difference between the employees' average salaries and their governmental
franchise benefits, multiplied by 1.75% for each year of credited service.
Wedco Holland B.V. also maintains a pre-pension plan for all employees
who are eligible for the basic pension plan. Under this plan, an employee may
opt between the ages of 60-62 for early retirement. These employees will remain
under the pre-pension plan until the age of 65 at which time they will be
eligible for the basic pension plan. During the early retirement period,
eligible employees opting for early retirement will receive 50% to 75% of their
salaries at date of retirement. Annually, employees contribute 1.43% of their
salaries towards their pre-pensions. The Company will contribute the difference
between what has been built up by means of annual premiums and what is necessary
to be paid out during the early retirement period. Note that the current
pre-pension accrual is only for the amount which will have to be paid to those
employees who may opt to go with early retirement within the term of the current
plan. Another part of the pre-pension plan is an individual pension feature.
Under this feature, employees who are at least 25 years of age and have at least
one year of service (excluding management) may contribute during their
employment periods to build additional pension rights. If employees contribute,
the Company will, in turn, contribute annually towards the employees'
pre-pension benefit up to a maximum of Dfl 500 ($242 using September 30, 1999
exchange rates).
Wedco UK maintains a Group Personal Pension Scheme, in which all
employees of Wedco UK that have completed six months of service are eligible to
participate. Under the provisions of the plan, the Company contributes 5% of
eligible earnings for all eligible employees. In addition, each eligible
employee may contribute any amount as a percentage of earnings up to the legal
maximum for Approved Personal Pension Plans which will be matched by the Company
up to 5% of eligible earnings.
J.R. Courtenay Ltd. and Courtenay Polymers Pty. Ltd., in New Zealand
and Australia respectively, maintain superannuation plans. These plan are
defined contribution plans and are required by law. They require the Company to
contribute 5% to 10% of the employees' ordinary salary depending upon the length
of employment. There are no waiting periods before being eligible to join the
plan.
Total expense for all employee benefit plans included in consolidated
results of operations for the years ended September 30, 1999, 1998 and 1997 was
$1,397, $1,084, and $990, respectively.
F-21
63
NOTE 14 - COMMITMENTS AND CONTINGENCIES
The Company leases certain transportation equipment, office space and
other machinery and equipment under operating leases which expire at various
dates through fiscal 2002. Rental expense was approximately $5,790 in 1999,
$6,168 in 1998, and $4,782 in 1997. Future minimum rental payments as of
September 30, 1999 are due as follows:
2000 $4,210
2001 3,019
2002 2,080
2003 1,364
2004 1,609
Thereafter 4,550
The Company is a named defendant in seven cases involving seven
plaintiffs, for personal injury claims alleging exposure to silica resulting in
silicosis-related disease. (The cases, all of which are pending in Texas state
courts, were initiated on May 13, 1991; November 21, 1991; August 26, 1992; June
29, 1995; August 15, 1995; July 23, 1997; and June 1, 1999). For the most part,
the Company is generally protected under worker's compensation law from claims
under these suits except to the extent a judgment is awarded against the Company
for intentional tort. The standard of liability applicable to all except one of
the Company's pending cases is intentional tort, a stricter standard than the
gross negligence standard applicable to wrongful death cases. The Company
currently has no pending cases in which wrongful death is alleged. Although one
suit against the Company involves negligence claims that, in theory, could
circumvent the Company's immunity protections under the workers' compensation
law, even if such circumvention occurred, the Company believed that this
litigation, referred to as the Roark litigation, should not have a material
adverse effect on the financial condition, results of operations and/or cash
flow of the Company. As described in more detail below, the Roark litigation
names the Company and Baker Hughes, Inc. ("Baker Hughes"), among others, as
defendants and falls within the provisions of an agreement between the Company
and Baker Hughes that limits the Company's obligations in the litigation.
In fiscal 1993, the Company settled two other suits, both of which
alleged wrongful death caused by silicosis-related diseases, which resulted in a
total charge of $605. In 1994, the Company was dismissed without liability from
two suits alleging intentional tort against the Company for silicosis-related
disease. In 1996, the Company obtained a non-suit in two other intentional tort
cases and in early 1997 was non-suited in an additional tort case. During the
second quarter of fiscal 1998, three cases involving alleged silicosis-related
deaths were settled. The Company was fully insured for all three cases and, as a
result, did not incur any settlement costs. During the second quarter of fiscal
1998, the Company was non-suited in one intentional tort case, and during the
fourth quarter of fiscal 1998, the Company was non-suited in two additional tort
cases. During the second quarter of fiscal 1999, the Company was non-suited in
one intentional tort case, and during the fourth quarter of fiscal 1999, the
Company was non-suited in an additional intentional tort case. The Company and
its counsel cannot at this time predict with any reasonable certainty the
outcome of any of the remaining suits or whether or in what circumstances
additional suits may be filed. Except as described below, the Company does not
believe, however, that such suits will have a material adverse effect on its
financial condition, results of operations or cash flows. The Company has in
effect in some instances general liability and employer's liability insurance
policies applicable to the referenced suits; however, the extent and amount of
coverage is limited and the Company has been advised by certain insurance
carriers of a reservation of rights with regard to policy obligations pertaining
to the suits because of various exclusions in the policies. Except for the Roark
litigation, if an adverse judgment is obtained against the Company in any of the
referenced suits which is ultimately determined not to be covered by insurance,
the amount of such judgment could have a material adverse effect on the
financial condition, results of operations and/or cash flows of the Company.
F-22
64
The Company's agreement with Baker Hughes, pursuant to which Baker
Hughes Tubular Services ("BHTS") was acquired by the Company, provides that
Baker Hughes will reimburse the Company for 50% of the BHTS environmental
remediation costs in excess of $318, with Baker Hughes' total reimbursement
obligation being limited to $2,000 (current BHTS obligation is $1,650). BHTS is
a responsible party at two hazardous waste disposal sites that are currently
undergoing remediation pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA"). Under CERCLA, persons who were
responsible for generating the hazardous waste disposed of at a site where
hazardous substances are being released into the environment are jointly and
severally liable for the costs of cleaning up environmental contamination, and
it is not uncommon for neighboring landowners and other third parties to file
claims for personal injuries and property damage allegedly caused by hazardous
substances released into the environment. The two sites where BHTS is a
responsible party are the French Limited site northeast of Houston, Texas, and
the Sheridan site near Hempstead, Texas. Remediation of the French Limited site
has been completed, with only natural attenuation of contaminants in groundwater
occurring at this time. Remediation has not yet commenced at the Sheridan site.
Current plans for cleanup of this site, as set forth in the federal Record of
Decision, call for on-site bioremediation of the soils in tanks and natural
attenuation of contaminants in the groundwater. However, treatability studies to
evaluate possible new remedies for the soils, such as in-place bioremediation,
are being conducted as part of a Remedial Technology Review Program. Based on
the completed status of the remediation at the French Limited site and BHTS's
minimal contribution of wastes at both of the sites, the Company believes that
its future liability under the agreement with Baker Hughes with respect to these
two sites will not be material.
During December 1996, an agreement was signed by the Company and Baker
Hughes to settle the litigation of a dispute concerning the assumption of
certain liabilities in connection with the acquisition of BHTS in 1992. The
agreement stipulates that with regard to future occupational health claims, the
parties shall share costs equally with the Company's obligations being limited
to $500 for each claim and a maximum contingent liability of $5,000 ($4,500 net
of current accruals) in the aggregate, for all claims. This agreement governs
the Company's liability with respect to the Roark litigation, which involves
occupational health claims arising out of Roark's employment at BHTS. Based on
the limitation on the Company's obligations provided for in the agreement, the
Company does not believe the Roark litigation will have a material adverse
effect on the financial condition, results of operations and/or cash flow of the
Company.
On November 21, 1997, in an action initiated by the Company in October
1994, a Texas state court jury awarded the Company approximately $13,000 in the
trial of its case against John Wood Group PLC relating to the 1994 contract for
the purchase of the operating assets of NDT Systems, Inc. and certain related
entities. The court subsequently entered a judgment for $15,750 in the Company's
favor, which includes pre-judgment interest on the jury award. The Company is
also entitled to post-judgment interest. The Wood Group is currently appealing
the judgment and has posted a bond for the entire amount of the judgment. This
award has not been reflected in the Company's balance sheet or operating
results. The Company was represented on a contingency fee basis, and its
attorneys will receive a portion of the amount awarded to the Company.
Into the third fiscal quarter of 1999, Wedco was a plaintiff and a
counterclaim defendant, and the Company was a third party defendant in a lawsuit
filed on February 16, 1996 by Wedco against Polyvector Corporation
("Polyvector"), John Lefas, the principal shareholder of Polyvector, and Fred
Feder, a former director of Wedco, which was pending in the federal district
court for the District of New Jersey (the "New Jersey Action"). A proceeding
initiated on June 25, 1998 had been brought in the Ontario Court (General
Division) by WedTech Inc. and Polyvector against the Company and others for
damages and other relief (the "Canadian Action"). During the second fiscal
quarter of 1999, the parties to the New Jersey Action and the Canadian Action
reached an agreement that settled all outstanding issues in both actions. During
the third fiscal quarter of 1999, the parties entered into a settlement that
brought an end to the New Jersey Action and the Canadian Action. The terms of
the settlement will not have a material adverse affect on the Company's
financial condition.
F-23
65
ICO Tubular Services, Inc., a now-defunct subsidiary of the Company,
has been named as a Respondent in an arbitration claim made on August 7, 1998,
by Oil Country Tubular Limited ("OCTL"), a company based in India. OCTL alleges
that its claim, which it has brought in the Court of Arbitration of the
International Chamber of Commerce; arises in connection with a Foreign
Collaboration Agreement entered into between it and Baker Hughes Tubular
Services, Inc., a corporation whose name was changed to ICO Tubular Services,
Inc. after acquisition by the Company in 1992. OCTL claims, among other items,
that it did not receive technical assistance, spare parts, and certain raw
materials necessary for its oilfield tubular services plant in India. OCTL seeks
damages in excess of $96,000, calculated in part based on lost profit
projections over a number of years, from ICO Tubular Services, Inc. and its
co-respondent, Baker Hughes Incorporated ("BHI"). The Company had only
peripheral knowledge of the dispute between OCTL and BHI prior to the filing of
OCTL's claim. The arbitration proceeding is at an early stage, with answers to
OCTL's claim having been filed in November 1998. A hearing on the Company's
objection to the arbitration tribunal's jurisdiction over the Company (and the
objection to jurisdiction made by BHI) was held in London on October 5-7, 1999.
The arbitration tribunal has not yet ruled on this issue. Regardless of the
liability facts, about which the Company has no knowledge at this point, the
Company believes the damage claim is exaggerated. While the outcome of this
arbitration matter cannot be predicted, the Company plans to contest the claims
vigorously.
The Company is also named as a defendant in certain lawsuits arising in
the ordinary course of business. While the outcome of these lawsuits cannot be
predicted with certainty, ICO does not expect these matters to have a material
adverse effect on its financial condition, cash flows or results of operations.
NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION
As more fully discussed in Note 2, the following is a schedule of
assets acquired, liabilities assumed, and common stock issued in conjunction
with all acquisitions in 1999, 1998 and 1997:
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Trade receivables $ 1,524 $ 3,916 $ 21,248
Related party receivables -- -- 703
Inventories 27 3,620 6,751
Prepaid expenses and other assets 81 629 2,887
Property, plant and equipment 7,216 6,399 21,851
Goodwill 4,921 8,020 20,666
Investment in joint ventures -- -- (1,689)
Deferred tax asset -- 197 1,232
Accounts payable (648) (2,572) (9,696)
Accrued liabilities (140) (1,588) (9,164)
Deferred tax liability (1,203) (982) (3,993)
Income taxes payable (325) -- --
Long-term debt (3,769) (147) (13,360)
Common stock issued -- -- (8,040)
---------- ---------- ----------
Cash paid, net of cash acquired $ 7,684 $ 17,492 $ 29,396
========== ========== ==========
During 1998, the Company exchanged $562 of debt for 114,917 shares of
common stock.
During fiscal years 1999, 1998 and 1997, the Company issued to
employees $523, $504, and $333 worth of common stock, respectively, in
connection with the Company's domestic benefit plans. See Note 13 - "Employee
Benefit Plans".
F-24
66
NOTE 16 - SEGMENT AND FOREIGN OPERATIONS INFORMATION
During fiscal 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." Prior years' segment
information has been restated to conform to the current year presentation. The
Company's two reportable segments consist of the primary products and services
provided by the Company to customers including Petrochemical Processing Services
and Oilfield Services.
The Petrochemical Processing segment provides size reduction,
compounding, concentrates manufacturing, distribution and related services. The
primary customers of the Petrochemical Processing segment include large
producers of petrochemicals, end users, such as rotational molders, and polymer
distributors. Worldwide sales to one petrochemical processing customer accounted
for 13% of the Company's consolidated revenues.
The Oilfield Service business segment provides oilfield tubular and
sucker rod inspection, reconditioning and coating services and also sells
equipment to customers. This segment's customers includes leading integrated oil
companies, large independent oil and gas exploration and production companies,
drilling contractors, steel producers and processors and oilfield supply
companies. No single Oilfield Service customer accounted for more than 10% of
the Company's consolidated revenues.
The accounting policies of the reportable segments are the same as
those described in the Summary of Significant Accounting Policies (see Note 1).
There are no material inter-segment revenues. The Company evaluates the
performance of its segments based upon revenues and operating income.
Summarized financial information of the Company's reportable segments
for the years ended September 30, 1999, 1998 and 1997 is shown in the following
table.
PETROCHEMICAL OTHER
PROCESSING OILFIELD RECONCILING
SERVICES SERVICES ITEMS * TOTAL
---------------- ----------------- ----------------- ---------------
FISCAL YEAR 1999
- ------------------------------------
Revenues $187,477 $ 74,896 $ -- $262,373
Operating Loss (1,967) (376) (12,237) (14,580)
Total Assets 180,582 74,829 44,424 299,835
Depreciation and Amortization
Expense 10,692 5,381 1,001 17,074
Expenditures for additions to
long-lived assets 10,028 5,156 149 15,333
FISCAL YEAR 1998
- ------------------------------------
Revenues $177,232 $104,111 $ -- $281,343
Operating Income (Loss) 10,526 13,025 (14,475) 9,076
Total Assets 200,718 69,491 58,468 328,677
Depreciation and Amortization
Expense 9,524 4,845 1,020 15,389
Expenditures for additions to
long-lived assets 18,018 7,752 373 26,143
F-25
67
Petrochemical Other
Processing Oilfield Reconciling
Services Services Items* Total
------------- --------- ----------- ---------
FISCAL YEAR 1997
- ------------------------------------
Revenues $100,018 $98,024 $ -- $198,042
Operating Income (Loss) 8,180 14,447 (9,217) 13,410
Total Assets 163,882 65,377 92,494 321,753
Depreciation and Amortization
Expense 6,124 4,996 229 11,349
Expenditures for additions to
long-lived assets 10,954 4,548 245 15,747
*Consists primarily of corporate overhead expenses and unallocated
corporate assets. Corporate assets include cash, deferred tax assets,
unamortized bond offering expenses, corporate equipment, and certain
patents and licenses.
A reconciliation of total segment operating income to consolidated
income before taxes and extraordinary items is as follows:
1999 1998 1997
---------- ---------- ----------
Total operating income (loss)
for reportable segments $ (14,580) $ 9,076 $ 13,410
Gain on sale of equity investment -- 11,773 --
Interest income 1,921 3,771 2,001
Interest expense (13,831) (13,819) (5,765)
Equity in income of joint ventures -- -- 385
Other (51) (20) 217
---------- ---------- ----------
Consolidated income (loss) before taxes and
extraordinary item $ (26,541) $ 10,781 $ 10,248
========== ========== ==========
The following is revenue and long-lived asset information by geographic
area for years ended September 30:
Revenues Long-lived Assets
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
United States $145,052 $167,523 $144,528 $109,554 $113,353 $104,008
Foreign 117,321 113,820 53,514 75,613 70,951 56,950
-------- -------- -------- -------- -------- --------
$262,373 $281,343 $198,042 $185,167 $184,304 $160,958
======== ========= ======== ======== ======== ========
Foreign revenue is based on the country in which the legal subsidiary
is domiciled. Revenue from no single foreign country was material to the
consolidated revenues of the Company. Long-lived assets include net property,
plant and equipment, goodwill, debt offering costs, deferred tax assets, patents
and other long-term assets.
F-26
68
NOTE 17 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table presents selected financial information for each
quarter in the fiscal years ended September 30, 1999 and September 30, 1998,
respectively.
THREE MONTHS ENDED
---------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999(1) 1999 1999
------------ --------- -------- -------------
Net sales $ 62,791 $ 63,546 $ 65,495 $ 70,541
Gross profit 14,798 12,113 16,392 17,426
Operating income (loss) 81 (18,800) 188 3,951
Net income (loss) before extraordinary item (2,414) (15,856) (2,307) 475
Net income (loss) (2,414) (15,457) (2,307) 475
Basic earnings (loss) per share before extraordinary item $ (0.13) $ (0.74) $ (0.13) $ 0.00
Diluted earnings (loss) per share before extraordinary item $ (0.13) $ (0.74) $ (0.13) $ 0.00
Basic earnings (loss) per share after extraordinary item $ (0.13) $ (0.72) $ (0.13) $ 0.00
Diluted earnings (loss) per share after extraordinary item $ (0.13) $ (0.72) $ (0.13) $ 0.00
Basic weighted average shares outstanding 22,108,000 22,113,000 22,114,000 22,117,000
Diluted weighted average shares outstanding 22,108,000 22,115,000 22,132,000 22,176,000
(1) During the second quarter, the Company recognized an extraordinary gain
on the repurchase of debt (see Note 3) and charges for several special
items (see Note 4).
THREE MONTHS ENDED
--------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997(2) 1998 1998 1998
----------- ----------- ----------- -----------------
Net sales $ 65,565 $ 71,002 $ 73,184 $ 71,592
Gross profit 16,407 18,103 17,766 17,211
Operating income (loss) (1,892) 4,296 3,820 2,852
Net income 3,680 1,094 667 565
Basic earnings per common share $ 0.14 $ 0.03 $ 0.01 $ 0.00
Diluted earnings per common share $ 0.14 $ 0.03 $ 0.01 $ 0.00
Basic weighted average shares outstanding 21,760,000 21,840,000 21,944,000 21,963,000
Diluted weighted average shares outstanding 22,160,000 21,916,000 21,964,000 21,975,000
(2) During the first quarter of fiscal 1998, the Company sold its equity
investment in WedTech for $14,484 and recognized an pre-tax gain of
$11,773.
F-27
69
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
2.1 -- Share Purchase Agreement between Rotec Chemicals Ltd. and the Registrant (filed as Exhibit 99.2 to
Form 8-K dated May 12, 1997)
2.2 -- Plan of Merger of ICO Merger Sub, Inc. with and into ICO, Inc. (filed as Exhibit 2.4 to Form 10-Q dated
August 13, 1998)
3.1 -- Articles of Incorporation of the Company dated March 20, 1998. (filed as Exhibit 3.1 to Form 10-Q dated
August 13, 1998)
3.2 -- Statement of Resolution of $6.75 Convertible Exchangeable Preferred Stock dated March 30, 1998 (filed
as Exhibit 3.2 to Form 10-K dated December 23, 1998)
3.3 -- Certificate of Designation of Junior Participating Preferred Stock of ICO Holdings, Inc. dated March 30,
1998 (filed as Exhibit 3.3 to Form 10-K dated December 23, 1998)
3.4 -- Amended and Restated By-Laws of the Company dated May 12, 1999 (filed as Exhibit 3.4 to Form 10-Q
dated May 14, 1999).
4.1 -- Indenture dated as of June 9, 1997 between the Company, as issuer, and Fleet National Bank, as trustee,
relating to Senior Notes due 2007 (filed as Exhibit 4.1 to Form S-4 dated June 17, 1997)
4.2 -- First Supplemental Indenture and Amendment dated April 1,1998 between the Company, as issuer, and
State Street and Trust Company (formerly Fleet National Bank), as trustee, relating to Senior Notes due
2007 (filed as Exhibit 4.2 to Form 10-Q dated May 15, 1998)
4.3 -- Second Supplemental Indenture and Amendment dated April 1, 1998 between ICO P&O, Inc., a wholly
owned subsidiary of the Registrant, and State Street and Trust Company (formerly Fleet National Bank),
as trustee, relating to Senior Notes due 2007 (filed as Exhibit 4.3 to Form 10-Q dated May 15, 1998)
4.4 -- Warrant Agreement -- Series A, dated as of September 1, 1992, between the Registrant and Society National
Bank (filed as Exhibit 4 of the Registrant's Annual Report on Form 10-K for 1992)
4.5 -- Stock Registration Rights Agreement dated April 30, 1996 by and between the Company, a subsidiary of
the Company and the Wedco Shareholders Group, as defined (filed as Exhibit 4.4 to Form S-4 dated May
15, 1996)
4.6 -- Shareholders' Rights Agreement dated November 20, 1997 by and between the Company and Harris
Trust and Savings Bank, as rights agent (filed as Exhibit 1 to Form 8-A dated December 22, 1997)
70
EXHIBIT NO. EXHIBIT
- ----------- -------
4.7 -- Shareholder Rights Agreement dated April 1, 1998 by and between the Registrant and Harris Trust and Savings
Bank, as rights agent (filed as Exhibit 4.7 to Form 10-Q for the quarter ended March 31, 1998)
10.1 -- ICO, Inc. 1985 Stock Option Plan, as amended (filed as Exhibit B to the Registrant's Definitive Proxy
Statement dated April 27, 1987 for the Annual Meeting of Shareholders)
10.2 -- Second Amended and Restated 1993 Stock Option Plan for Non-Employee Directors of ICO, Inc. (filed
as Exhibit A to the Registrant's Definitive Proxy Statement dated January 26, 1999 for the Annual Meeting
of Shareholders)
10.3 -- 1994 Stock Option Plan of ICO, Inc. (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
June 24, 1994 for the Annual Meeting of Shareholders)
10.4 -- ICO, Inc. 1995 Stock Option Plan (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
August 10, 1995 for the Annual Meeting of Shareholders)
10.5 -- ICO, Inc. 1996 Stock Option Plan (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
August 29, 1996 for the Annual Meeting of Shareholders)
10.6 -- ICO, Inc. 1998 Stock Option Plan (filed as Exhibit A to Registrant's Definitive Proxy Statement dated
January 23, 1998 for the Annual Meeting of Shareholders)
10.7 -- Willoughby International Stockholders Agreement dated April 30, 1996 (filed as Exhibit 10.9 to Form S-4
dated May 15, 1996)
10.8 -- Consulting Agreement-- William E. Willoughby (filed as Exhibit 10.13 to Form S-4 dated May 15, 1996)
10.9 -- Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.14 to Form S-4 dated May
15, 1996)
10.10 -- Addendum to Salary Continuation Agreement-- William E. Willoughby (filed as Exhibit 10.15 to form S-
4 dated May 15, 1996)
10.11 -- Non-Competition Covenant William E. Willoughby (filed as Exhibit 10.11 to Form S-4 dated May 15, 1996)
10.12 -- Stockholders Agreement respecting voting of shares of certain former Wedco common
shareholders (filed as Exhibit 10.21 to Form S-4 dated May 15, 1996)
10.13 -- Stockholders Agreement respecting voting of shares of certain ICO common shareholders
(filed as Exhibit 10.22 to Form S-4 dated May 15, 1996)
10.14 -- Employment Agreement dated April 1, 1995 by and between the Registrant and Asher O. Pacholder and
amendments thereto (filed as Exhibit 10.16 to Form 10-K dated December 29, 1997)
10.15 -- Employment Agreement dated April 1, 1995 by and between the Registrant and Sylvia A. Pacholder and
amendments thereto (filed as Exhibit 10.17 to Form 10-K dated December 29, 1997).
10.16 -- Employment Agreement dated September 4, 1998 by and between the Registrant and Jon C. Biro (Filed as
Exhibit 10.20 to Form 10-K dated December 23, 1998)
71
EXHIBIT NO. EXHIBIT
- ----------- -------
10.17 -- Employment Agreement dated September 4, 1998 by and between the Registrant and Isaac H. Joseph
(Filed as Exhibit 10.21 to Form 10-K dated December 23, 1998)
10.18** -- Employment Agreement dated September 4, 1998 by and between the Registrant and Robin E. Pacholder
10.19** -- Employment Agreement dated August 5, 1999 by and between the Registrant and David M. Gerst
21** -- Subsidiaries of the Company
23.1** -- Consent of Independent Accountants
27** -- Financial Data Schedule
- -----------------
** Filed herewith